All this want insurance that the things we buy are safe.
What is the best way for us to get it?
One way is to have a government agency assess products and allow or forbid their sale.
This is the way it works for medicines.
The food and drug administration requires and oversees lengthy expensive tests of each
new drug.
Based on those tests it decides whether or not that drug maybe used.
A different approach is to allow competing private firms to assess the products and give
each one a rating.
Customers decide for themselves whether to buy or not based on these ratings.
This is the way it works for thousands of products from toasters and hair dryers to
installation and bullet proof vests.
Manufacturers hire a private certification firm such as underwriter's laboratories to
evaluate their products design and manufacturing process and to test it.
If the product passes the certifier's logo is added to it.
Manufacturers pay for private certification because it increases sales.
The customers who see the logo know that the product is passed rigorous safety tests and
they are more likely to buy it as a result.
Stores also value assurances of product safety.
They don’t want unhappy customers or law suits from selling things that turn out to
be harmful.
So they will pay extra to stock certified products.
Certification firm such as underwriter's laboratories have no monopoly.
They have competitors.
Accordingly they have a strong incentive to be cautious but also fast and affordable for
manufacturers.
On the one hand they depend on their reputations for trustworthiness built up over the years.
A certifier who puts it's logo on a product that turns out to be dangerous ends up with
a damaged reputation and a higher likelihood that manufacturers will use a competing certifier
in the future.
On the other hand if a certifier is over cautious and takes a long time on costly extra testing
that delays a product from getting to market or if it refuses to certify a product that
turns out to be safe again it will loose customers.
Self interest pushes these competing certifiers to avoid both kinds of mistakes neither certifying
dangerous products nor refusing to certify safe ones.
Compare this to a government agency that has a monopoly on deciding whether a good becomes
available.
Its incentives are very different.
What happens when such an agency approves a dangerous product that ends up causing harm?
There are serious consequences for the careers of the officials who let that happen.
As a result they become excessibly cautious.
They take so long on costly extra testing that they do delay products from getting to
market.
When the product is a life saving medicine people die who could have been saved.
Unlike a voluntary certification firm a monopoly government agency faces no check on this kind
of caution.
If the agency rejects a product that is safe or takes years for additional tests the manufacturer
cannot turn to another certifier.
No other certifiers are permitted.
The government agency doesn’t have to worry about losing revenue or going out of business
because it is funded by taxation and not by the voluntary payments of its manufacturer
or customers.
How much safety is the right amount?
It is always possible to test a product one more time before selling it but the test costs
time and resources to run so the more the rigorous the safety testing procedures the
more manufacturer must charge to cover its costs and the less money it has to invest
in new products.
Who should decide at what point the cost of more tests becomes too high?
Under monopolized government safety regulation government officials decide.
Under voluntary certification in a free market everyone decides for him or herself usually
with the help of certification agencies and professionals such as doctors and pharmacists
who make it their business to learn all they can about the products they advise us to use.
Instead of the one size fits all approach in which the government bans all products
that fail to meet arbitrarily determined criteria.
The market process creates and communicates various assurances of product safety and each
buyer decides for him or herself.