The "Would Have Banned" Label

by Robin Hanson

Government regulators often ban products they claim to be of especially low quality, via professional licensing, building codes, and approval required for foods, drugs, and financial securities. For most of these products there are few apparent externalities (ways in which product use would hurt third parties).

Even granting ideal regulator incentives and insight, and granting that regulators are for some reason the best people to create this product information, rational consumers should be no worse off, and often better off, if these regulators were to just clearly label a product as not up to their standards.

So imagine a broad new law, perhaps a constitutional amendment, which prohibits regulators from banning any product without substantial use externalities. Instead, imagine a single standard icon, perhaps a skull and crossbones, a dead cat, or a big "BAD", which says "We regulators would have banned this product, except that's not constitutional now. Don't buy it." (Further imagine a small educational campaign to ensure that everyone understands this icon.)

With ideal regulators, this new label should convey as much information as banning would have, and so roughly rational consumers should be no worse off. If regulators are far from ideal, the worst that the regulators can do is just waste their funding (since consumers can always ignore them). And in either case, consumer liberty would be expanded.

Note that product use externalities might be minimized by allowing for extra legal liability when such labelled products are involved in an injury. For example, the driver of a BAD care might be presumed more to be at fault in an accident.

Also note that this issue is separate from the issue of what futher labeling to require. Issues for further labeling requirements would include packaging burdens and cognitive limits. Regulators don't often put distinguishing quality labels on products they don't ban, so the one label case is the common one.

If consumer irrationality is the real issue here, then I sure wish ban advocates would describe their theory of consumer mistakes in more detail, so we could do some experiments to test those theories. It is also not clear why regulators should be more rational, or that irrational voters would support bans by regulators whose labels they wouldn't believe.

Robin Hanson June 19, 1996
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