Theories of Occupational Regulation
Cries for government regulation in the "private interest" usually occur when there is a "market failure" due to natural monopolies, imperfect (asymmetrical) information, negative externalities (Horowitz 1980), barriers to market entry, or heterogeneous providers or services (Wolfson et al. 1980).
The perfectly competitive market model relies on willing buyers and willing sellers who have information regarding each other's preferences and can communicate them. When one side of the transaction has less market information, for example because of lack of access, this is labeled asymmetrical information.
Externalities exist when a third party has an interest in the transaction. This often occurs in the case of environmental impacts, which are not counted in the transaction between producer and consumer.
Barriers to free market entry or exit may take the form of government regulation, which restricts who may enter into a certain business or extremely high capital investment requirements which dictate that only those with enough capital to cover the start-up costs may engage in a certain business.
The perfectly competitive market model also assumes that products and services that are labeled the same are homogenous. This, however, may not be the case where the quality can vary significantly.
The Public Interest
Invoking the public interest has been a common argument for regulation (Rottenberg 1980, Wolfson 1980, Benham 1980, Shimberg 1982). As early as the fourteenth century, occupational guilds tried to restrict production and also entry into their occupations (Benham 1980). Pleas for restriction were made in the name of the public good or through a claim to specialized knowledge (Zhou 1993). Rarely do consumers of a service petition for occupational regulation, and rarely is the public interest specified. Instead, occupational regulation is proposed to protect consumers when they cannot obtain the information adequately to judge the quality of services sold to them.
It follows that the most extensively studied field is health care (Haug 1980, Graddy 1991), which contains more than half the regulated occupations. Physicians, registered nurses, licensed practical nurses, physicians assistants, dentists, dental hygienists, and dental assistants have been the subject of many studies of occupational regulation. Medicine also had the first occupational regulation in the United States in Virginia in 1736, which distinguished between practitioners with and without degrees (Zhou 1993).
Most of the laws on occupational regulation have been advocated by current practitioners in the occupation or profession (Wolfson et al. 1980, Lowenberg and Tinnin 1992). In the case of licensing, the benefits to practitioners are clear-if they can restrict entry into their occupation, they can increase their profits. One hypothesis is that legislatures are lobbied effectively by strong supplier interest groups and pass legislation to restrict supply (Lowenberg and Tinnin 1992). A corollary is that supplier (occupational) interest groups are concentrated and focused, and therefore more effective than interest groups composed of consumers with diverse interests. Zhou (I 993) found a positive coff elation between the power and resources of an occupation and the likelihood that it would be licensed. A major factor is the success of the occupation in gaining public acceptance ("taken for grantedness") of its claims to specific knowledge or its other rationalizations for the need for licensing.
Wolfson (1980) addresses the problem by proposing a formal definition of the public interest using four principles valued by Western societies: efficiency, fairness, practicability, and accountability. In addition, the public interest can be divided into first party (suppliers), second party (consumers), and third party interests (those affected by the first and second party transaction).
Efficiency is defined here as static Pareto optimum efficiency, i.e. the state where no one can be made better off without someone else being made worse off. Signals between producers and consumers mean that buying and selling occurs at agreed upon prices.
Fairness is substituted for the traditional policy criteria of equity by Wolfson et al. (1980) who define fairness procedurally. That is, a policy is fair if every party receives equal treatment from the policy process and each time the process is used it is with the same set of rules.
Practicability is the ease of implementation of a policy (Wolfson et al. 1980). Policy administrators (whether governmental or private) must be able to understand, assess, and, if necessary, change the policy if problems result.
Accountability is the final principle. Decision makers must be subject to withdrawal of support. Affected parties must have information and be able to represent their interests (Wolfson et al. 1980). Accountability to the public is one of the challenges of self regulation. It requires that instead of or in addition to being subject to peer review, members are judged by laypersons. This raises the question of the ability of consumers (laypersons) to judge the quality of the output or outcome (Haug 1980). One way to address this is through selection of lay reviewers, or monitoring members who have appropriate training.
Market Failures Due to Asymmetrical Information
The case for government regulation in a market with asymmetrical information is well documented. Information is asymmetrical, for example, when consumers cannot adequately judge the quality of the product or service they are buying, yet producers can judge the demand for their product. This is the case, for example, when the costs for obtaining information are high for the consumer but not for the producer. The specific case of asymmetrical information exists when forest landowners, the consumers, cannot adequately judge the quality of the logging service that they are buying, yet loggers (producers) can judge the demand for their service. When small landowners function as the producers of standing timber, they usually have inadequate information to place a fair market value on their timber, yet loggers and timber buyers are well informed regarding the market values of the forest products that they purchase.
If information were "perfectly" asymmetrical, where producers had complete information but consumers had none, market failure theory says that only the cheapest quality of a product or service would be produced and offered. In markets with information asymmetry, too little of high-quality goods will be produced in the case where producers (sellers) costs increases with quality (Leland 1979).
The obvious remedy for this particular market failure is to reduce or eliminate high information costs. Market failure due to asymmetrical information may also be addressed through means that do not restrict the number and quality of practitioners in the occupation but that make it possible for consumers to judge the quality of the service themselves.
Where information asymmetry is high and regulation would provide the information necessary to enable the consumer to make an evaluation of quality, the perceived value of regulation is high (Graddy 1991).
An effect upon a third party that is not taken into account, purposefully or accidentally, by either the producer or consumer of a good or service, is an externality. When either the consumer or producer or both take this effect into account, it is known as internalizing the externality. In the case of a negative externality, the unaccounted for effect is bad, and internalization will raise the production cost and/or consumers' costs. For a positive externality, the unaccounted for effect is good. This might be the case, for example, of loggers who produce or protect aesthetic values above that called for by law and in their contracts. Because of this positive externality, they receive no additional income from the production of the benefit.
Much of the pressure for forest-practice regulation comes from third parties interested in externalities. Water quality effects, for example, especially downstream, are an externality from timber harvesting in the absence of water-quality regulation. In this case, producers who incur higher costs to follow practices that produce higher water quality have no way to benefit financially from these efforts. Third parties downstream have no means to force producers using lower quality practices to account for their costs of lower water quality. Aesthetic qualities of forests, appreciated by many but paid for by few, are argued to be underproduced, with regulation the remedy. Regulation is one approach to address third party interests, but it limits consumers' choices and increases the costs to them. (Wolfson et al. 1980).