November 30, 2010

Uncle Sam, quit regulating Santa!

“Tests on Toys” by ABC’s Jennifer Kerr, addresses the regulation toy manufactures are currently under. Regulation is enforced by the government to make sure the toy firms produce safe toys. Miss. Kerr seems to be very pro-regulation. Unfortunately, Miss. Kerr fails to explain the economic result of the regulation. While toy regulation has been around for a while it was increased in 2008 and some wish to increase it further. The news article fails to express any economic view points. I wish to point out what the article missed.

While it is true that "toys are safer than ever" this regulation will increase the costs of the firm. Looking at a basic supply demand diagram, from the original equilibrium point an increase in regulation will increase cost for the firm (for things such as hiring new designers and purchasing new manufacturing equipment). The firm’s quantity supplied will decrease. Eventually, because the regulation affects all toy firms, the overall price for holiday consumers will increase. The increase in regulation will make it harder for producers and consumers alike. Due to the increase in price, consumers have a smaller budget line, in effect less money. This regulation is making it harder on both consumers and producers in this recession. It would be a better idea to forgo regulation or at least not add more regulation as they have done in the past. This option would be better for both consumer and producer.

The buyer still needs to deal with safety concerns. Miss. Kerr seems to think that consumers can not make good purchasing decisions without regulation. Consumers wish to maximize their utility, something they are probably not achieving if their child chokes on a toy. Consumers will purchase most merchandise from the firm who maximizes consumer utility best. The firms who are the most carful in producing toys will receive the most business.

At the end of Miss. Kerr’s article, she talks about a company that complied with the government regulation and still had a child choke on a toy. This happened even when the toy meet every single regulation standard. While Miss. Kerr seems to advocate increasing regulation, this is unnecessary. The company in the example recalled all the toys, and quickly fixed the problem. The firm was doing its best to make consumers happy. Accidents will always occur, but the firm that fixes these mistakes and maximizes consumer utility will stand in the end. If the toy market is a perfectly competitive market, other manufactures will be forced to do the same or eventually drop out of the market.

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