PETER VAN DOREN
Market failure is the most frequent rationale for government regulation of markets, but most regulated markets are not characterized by market failure. And even in those markets regulation does not enhance market efficiency. Instead, regulation redistributes from some firms to others and from some consumers to others and reduces efficiency. It does so by preventing open price bidding among suppliers and purchasers, thereby raising prices above competitive levels. In addition, regulation administration and compliance costs consume resources.
Even though regulation is costly and inefficient, it is difficult to change. Political support for regulation of markets comes from both “bootleggers” (special interests who gain economically from the existence of regulation) and “Baptists” (those who do not like the behavior of others, view such behavior in moral terms, and want the government to restrict the behavior).
Land market regulation is consistent with stylized facts of regulation in other markets. The market value of land is affected by the uses of land nearby. Such positive and negative externalities, in theory, can be resolved by contract, but the transaction costs of obtaining all landowners'consent to such contracts in already developed areas are very large. Public solutions to land use externalities (i.e., zoning) redistribute wealth, but unlike regulations in other markets, zoning does enhance efficiency by reducing the risk of real estate value fluctuation rather than simply redistributing without any efficiency gains. But publicly provided zoning rights also are inefficient because no explicit market