How Consumers are Protected in the Free-Market

One justification for government involvement in a free-market economic system is the need for consumers to be protected from potentially faulty or harmful products. In a free-market system there are many products sold by companies trying to make a profit. From pharmaceutical drugs to automobiles, these products could be deadly to consumers if they are made poorly. Government regulation is often touted as the solution to protect consumers from potentially dangerous products being sold on the market. However, the best way to protect consumers is through free-market competition and courts of law, not government bureaucracy.

Regulatory agencies such as the FDA are seen as necessary because drugs need testing before we can confidently consume them. The logic of needing government to approve of the drugs before they can be sold stems from believing that for-profit companies in a capitalistic system are only concerned about making money and not consumer health. However in order to make a profit, companies must be concerned about the effect that their product will have on its customers. If a product on the market negatively effects consumers then consumers will cease to buy it and the company will go out of business. The motive for profit provides businesses a greater incentive to make a safe product than any incentive a government bureaucrat has to effectively regulate and test a product.

In addition to being concerned of their product’s reputation, businesses also fear being sued for selling products that harm consumers. A classic example of this is when McDonald’s was sued for millions of dollars for serving coffee that was severely hot and gave one of its customers third degree burns when spilled. After the court settlement, McDonald’s and other businesses that sold coffee made sure not to serve it too hot again out of fear of losing millions in another potential law suit. This form of businesses regulating themselves is much more efficient and effective than having a government regulatory agency checking the temperature of coffee served at every coffee shop to ensure it is the correct temperature.

Of course consumers would like to be confident of a product when it first comes out rather than having to wait for it to gain a safe reputation on the market or wait for a law suit to expose any faulty business practices. This too can be achieved via the free-market without government. Government services that approve products to be sold, such as the FDA, can be done better by a private, for-profit company. This can be done by businesses hiring a private certification firm to approve of their product and put their stamp of certification on the product. Businesses will pay private firms to do this in order to increase sales and customer confidence. The firms that certify products have an incentive to be both cautious and fast in determining if a product if safe. They must be cautious because if they certify unsafe products then consumers will no longer respect their certification and it would provide no value for companies to use. Additionally, they must work quickly because if they take too long businesses won’t hire them to certify their product. Government monopolies on certifications do not have these powerful market incentives. The only incentive government regulators have is to err on the side of caution because the public does not know if they are taking too long to approve a product, but there will be much public outcry if they approve an unsafe product.

Supporters of government certification over private certification assert that it is a good thing to err on the side of caution even if it means delaying the release of a product much longer than a private certification company would. After all, this is about consumer safety, so they conclude that caution is always a good thing. However, delaying a product such as a drug that could cure a fatal illness is even more harmful to the public. It will never be known how many lives could have been saved if an agency would have approved a drug faster than they did, so there is no incentive for government certifiers to make their decision in a timely manner. Unfortunately, bad incentives cause government regulators to err too much on the side of caution at an unseen price to the public.

When it comes to protecting consumers, government bureaucracy is not the best solution. Business incentives, courts of law and private certifying firms are all ways that consumers can be protected in a free-market system of exchange. Government regulatory agencies do not possess the powerful incentives that private businesses have and therefore cannot be trusted with a task as important as consumer safety.


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