The Social Cost of Uniform Regulatory Standards

Abstract

Uniform regulatory standards, frequently employed in environmental health and safety, are widely criticized as inefficient on the grounds that all firms are required to comply, regardless of compliance cost. Since firms will self-select to comply only if their compliance costs exceed the expected penalty for non-compliance, the inefficiency could be avoided by an enforcement policy chosen to maximize social welfare. But we argue that the enforcement agency goal is likely to place a larger weight on the benefits of compliance than on the costs of compliance, which will produce distortions. We show that the legislature can reduce the resulting distortions by limiting the enforcement agency budget and by permitting the agency partially to self-finance, by retaining a portion of its noncompliance penalties. Finally, if the enforcement agency has a good "signal" of firms' compliance costs, the distortions can be made very small by appropriate choice of the enforcement budget.