Toothonomics 101: Regulated Markets

Last week we looked at free markets. But sometimes free markets don’t work well for everyone involved in them.

That’s where regulated markets come in. In a regulated market, an entity—typically a government—will put certain restrictions, controls or privileges on a market.

A classic example of a regulated market is where a government prohibits a factory from dumping toxic chemicals into a river.

From a purely financial perspective, dumping the chemicals makes sense for the factory—it’s much cheaper than paying to have them properly disposed of.

The polluted water may lead to cancer and other illness for people who live near the river, though, or it may degrade a place people use to fish or swim. So the government decides the value of the health and enjoyment of its citizens outweighs the burden the factory faces to properly dispose of the waste.

On the other hand, the factory may argue that regulating it is inefficient, unfair and stifles innovation. It could say that a free market allows people to decide whether they want to buy products from a factory that pollutes.

Let’s get back to our dental office. When we looked at free markets, we considered the case of whether it made sense for a dentist to make crowns in the office or send them out to a lab. Based on the labor costs for the dentist and the lab, it made sense to outsource crowns to the lab.

But say there was a lab using bad materials a few years ago, and patients fell ill after chemicals leeched from these bad materials. So the government decides all crowns made in labs may pose a health risk to its citizens, and requires labs to carry expensive insurance and have all crowns independently inspected by another lab. This regulation doesn’t apply if a dentist makes the crown.

While it is designed to protect people’s health, the regulation also triples the cost of the crown if the lab makes it. With the regulation, the balance shifts It now makes sense for the dentist to make the crown.

From one perspective, you can see how this is inefficient for the dentist and unfair for the lab. But from another perspective, you can see how the government values the health of its citizens.

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