Friday, January 9, 2009

The perverse economics of toy safety regulation

The Christian Science Monitor has an article about the unintended consequences of toy safety legislation passed in the wake of everything-from-China safety scare. Like many regulations intended to protect the public, this one has the all-too-predictable practical effect of driving small manufacturers out of business. The economic explanation is thus: product testing is a fixed cost, and so a company that produces more of a good will encounter an economy of scale, and thus average costs will be relatively unaffected by a mandatory testing regime compared to a small business that produces a smaller quantity of the same good. In essence, it harms small American-based businesses and gives large toy manufacturers an upper hand.

So who's benefited the most from a law intended to keep out low-cost Chinese manufacturers? Low-cost Chinese manufacturers:

"Once again, here's a situation where it's the small business that suffers the most," says Kathryn Howard, an environmental and consumer expert with the New York State Pollution Prevention Institute at Rochester Institute of Technology. "Mattel can easily afford to test every one of their Barbie dolls. The smaller guys are the ones that manufacture in the US – as opposed to China and other parts of the world.

Given that the toy scare was limited to one company – Mattel – and one toy – Barbies – you'd figure that the intense publicity around the whole thing would keep consumers from buying the toys and retailers from stocking them. In fact, without the government supposedly ensuring that all our children's toys are safe, we might have been a little more vigilant and the Barbies might not have been sold in the first place. Too bad American jobs had to be lost to perpetuate a failed regulatory regime.

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