When we hear the word “regulation,” most people immediately think of the government. After all, the government regulates nearly every industry that we rely on in our everyday lives, such as banking, aviation, education, medicine, and countless others.
But in addition to government regulation, there are also private companies in the world that perform a similar function. These companies operate for profit and make money by charging other businesses for the opportunity to be overseen or by selling consumers the results of their evaluations.
For example, the The Zagat Company runs a survey that ranks restaurants. Company representatives sample restaurants in over 70 cities nationwide and rank them on a 30 point scale. They then publish those results for sale online and in print so that consumers can subscribe to find highly-rated restaurants. Restaurants rated by Zagat often proudly display a sticker in their window advertising that fact.
When a potential customer sees the Zagat sticker in the window of a restaurant, he gains some assurance that the restaurant is of high quality. Each time Zagat endorses another good restaurant, their credibility as a company rises and the name “Zagat” gains more prestige. Thus, Zagat has a strong incentive to make sure that their ratings are truthful and accurate. Otherwise, Zagat would lose credibility and consumers would no longer be willing to pay for their recommendations.
Other examples of such companies include Best Western and Underwriters Laboratories, both of which lend their names as a mark of certification to quality products – hotels in the case of the former, and a wide array of consumer goods in the case of the latter.
Many businesses, small and large, eagerly pay to be inspected by such oversight companies. They choose to be inspected and monitored because it increases consumer confidence in their products and services.
Before doing business with a company, most consumers want to know if they are getting a good value. How can they tell if the product is of good value and worth the price? That is the function of oversight companies, which assure potential customers that the purchase they are about to make will be a good one.
However, this private oversight model is often criticized in favor of government regulation. A common criticism is that the integrity of private companies is compromised by their pursuit of profit. Yet all of the companies mentioned above operate with profit as their main incentive. The fact that firms such as Zagat and Best Western are still in business is a testament to the fact that there is no inherent conflict between integrity and profit.
To the contrary, the profit motive is precisely what deters them from cutting corners or being dishonest – the moment their integrity is compromised is the moment their value and viability as overseers is destroyed. No other companies will pay to be regulated by a firm that has no integrity, and thus, the oversight company will go out of business.
More importantly, the private oversight model represented by Zagat and other such companies inherently respects the individual’s fundamental right to freedom. A restaurant owner is free to open or close his kitchen to Zagat inspectors, while consumers are free to choose whether they base their dining decisions on Zagat ratings, another recommendation, or simply risk spending their money without any outside guidance.
Contrast this to government regulation bodies, such as the Food and Drug Administration (FDA), which regulates prescription medications in America. Under the current system, if a medical company wants to bring a new drug to market, they must pass the time consuming and incredibly expensive tests required by the FDA for safety and effectiveness. Life-saving medications are often delayed for years because drug companies must have the government’s blessing before they are legally allowed to sell them.
If a company wishes to offer a breakthrough cancer treatment on a trial basis to the terminally ill, for example, it is not free to do so – unlike a Zagat rating, an FDA rating is legally mandatory. Patients with potentially life-threatening illnesses don’t have any choice to ignore the lack of a rating on a medication in order to gain its potential benefits – their individual judgment is ignored by the regulators who force them to wait for government approval. If the patients survive long enough, they’ll perhaps be permitted to buy it in the future.
Cases like this highlight the fundamental problem with government regulation. It is not simply that government agencies are less efficient than their private counterparts, but that they operate using coercive power rather than allowing individuals the freedom to make decisions about their own lives. Similarly, the proper question to ask about consumers is not whether they can make better decisions for themselves than can a government bureaucrat, but whether they have the moral right to do so.
Companies like Zagat and Underwriters Laboratories demonstrate a private system which is not only more effective than government regulation, but more importantly preserves the moral right of individuals to make their own choices.
If allowed the opportunity, private oversight companies could bring us cheaper and better products while respecting our freedom in the process.