Policy Analysis No. 303

Private Regulation: A Real Alternative for Regulatory Reform

By Yesim Yilmaz
April 20, 1998

Executive Summary

The federal regulatory system in the United States needs reform. Today, federal regulations take too much time, money, and resources to deliver results. Each year, Americans spend $710 billion to finance federal regulatory agencies and to comply with the federal regulations.

The original meaning of “regulate”—as in the constitutional authorization to “regulate … interstate commerce”—was to “make regular.” In this sense, regulations provide customers information and help people make informed decisions so that they can protect themselves from dubious products.

But it is a mistake to assume that “regulation” necessarily involves the government. Much regulation in the American economy is private, produced and enforced by independent parties or trade associations. These private organizations can oversee market participants’ actions by different processes, such as standard setting, certification, monitoring, brand approval, warranties, product evaluations, and arbitration. Private regulation works, and it deserves closer attention.

The federal government should consider transferring regulatory functions such as certification, inspection, monitoring, and product testing to independent parties; it should also consider allowing independent parties to compete with federal agencies in setting standards.

Incorporating independent third parties into the regulatory process will eliminate the existing command-and-control system and replace it with a flexible, responsive, and evolutionary process. It will drastically reduce the compliance costs of regulations by decreasing the time and other resources spent by businesses and private individuals.

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Yesim Yilmaz is a Ph.D. candidate at George Mason University and a summer research fellow at the Center for Market Processes, George Mason University, Fairfax, Virginia.