CON Job: State "Certificate of Necessity" Laws Protect Firms, Not Consumers

By Sandefur, Timothy | Regulation, Summer 2011 | Go to article overview

CON Job: State "Certificate of Necessity" Laws Protect Firms, Not Consumers


Sandefur, Timothy, Regulation


When St. Louis businessman Michael Munie decided to expand his moving business to operate throughout the state of Missouri, he thought it would be a simple matter of paperwork. After all, he already held a federal license allowing him to move goods across state lines. But when he filed his application, he discovered that, under a 70-year-old state law, officials in Missouri's Department of Transportation were required to notify all of the state's existing moving companies and allow them the opportunity to object to his application. When four of them did file objections, department officials offered Munie the choice of withdrawing his application or appearing at a public hearing where he would be required to prove that there was a public need" for his moving business. The law is not clear on how exactly he would do this "public need" is not defined, nor are there any rules of evidence or procedure in the statute. And even if he managed to prove a "public need," the department would take anywhere from six months to a year to make a final decision, in the face of such complications, Munie chose to withdraw his application and ask instead for limited permission to operate within a portion of St. Louis. His competitors had no objection to that, and he was given the restricted license.

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Bizarre as this law might seem, it is only one of dozens of such requirements, generally called "certificate of necessity" (CON) laws, that exist across the country, governing a variety of industries, from moving companies and taxicabs to hospitals and car lots. A legacy of the early 20th century, CON laws restrict economic opportunity and raise costs for products and services that consumers need. Unlike traditional occupational licensing rules, they are not intended to protect the public by requiring business owners to demonstrate professional expertise or education. Instead, these laws are explicitly designed to restrict competition and boost the prices that established companies can charge.

The Rise of CON

CON laws were originally devised to regulate railroads and other public utilities. They first appeared in Massachusetts in the 1880s, and were soon taken up in other states, where they were often applied to streetcar lines.

As William K. Jones explains in his 1979 Columbia Law Review history of CON laws, Progressive Era proponents offered five main justifications for these restrictions: they would

* prevent "wasteful duplication" of services,

* prevent "ruinous competition,"

* ensure that regulated entities would continue to serve out-of-the-way customers,

* promote private investments in public service industries, and

* forestall certain kinds of externalities.

Many economists and social theorists of the time believed competition was economically inefficient because it wasted resources on, say, multiple railroad lines between the same destinations. Worse, they thought competition fostered the "boom-and-bust" cycle that drove out investment and ultimately left customers without the products and services they needed.

Although economists have discredited those theories in the decades since, many found them persuasive at the time, due in no small part to the frequency of fraud in railroad construction schemes. Shady businessmen would sometimes sell stock in prospective railroad lines that would never be constructed, or would build shoddy railroads and abscond with the investors' money. CON laws were expected to protect consumers by requiring pre-approval of any proposed line.

CON rules were also expected to counteract the economic inefficiencies that government regulations themselves caused. Railroads were often legally barred from charging market rates for travel or refusing unprofitable carriage. This created an incentive for rivals to engage in "cream-skimming"--i.e., maximizing profits by serving only large population centers and bypassing unprofitable routes or out-of-the-way customers.

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CON Job: State "Certificate of Necessity" Laws Protect Firms, Not Consumers
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