Policy Documents

Why Regulate? New Applications of the 'Johnston Test'

Joseph L. Bast –
August 1, 2010

How governments regulate businesses in their jurisdictions has a major effect on economic growth. Along with taxes and government spending, regulation is one of the three principal levers policymakers can move to shape the business climate of their nation, state, or city.

Most policymakers are relatively uninformed about why governments regulate in the first place, and consequently have difficulty framing the issue of regulatory reform. It is hardly their fault: the academic literature shows little consensus, and what agreement exists has not been presented in a fashion that elected officials can apply to the choices they face.

This essay attempts to fill this gap in the literature. It offers a brief survey of theories of regulation and the effects of regulation on economic growth, then comments on some of the key issues concerning regulation in the areas of consumer protection, the environment, and telecommunications. It then describes of what I call “the Johnston Test,” after economist Jim Johnston, and applies his theory to six areas of regulation. Finally, I explain why I believe “the Johnston Test” could be a very useful tool for policymakers at all levels of government.