A True Story of Efficient Regulation
By Bryan Caplan
I’m a member of local Fairfax pool. I don’t know exactly how this pool got started, but for about $400/year, my family was able to become a shareholder in this private non-profit.
One nice thing about this pool is that it has an old-fashioned, springy diving board. Well, actually, I should say that it had such a diving board. This summer, the board was closed down. Why? According to new regulations (or maybe old regulations no one had noticed?), the pool had to be a couple feet deeper in order to have this kind of diving board.
OK, so how is a pool funded by $400/year in fees from a few hundred families supposed to pay the hundreds of thousands of dollars required to meet the new regulations? The governing board quickly hit upon a simple solution: Sell an acre of unused land on the corner of the grounds. With land in Fairfax going for $500k/acre, it quickly became obvious that there was money to meet the new regulations and then some.
The upshot is that the new regulations indirectly caused $500k worth of otherwise completely wasted land to be put on the market. And that clearly looks like an efficient move to me. It is literally true that no one will miss that acre of land.
So if it was such a free lunch, why wasn’t the land sold previously? The answer, I hazard, is that the pool association is a non-profit. Every family has an equal share, including the members of the board. The upshot is that if the board had voted to sell the land and pay the proceeds as dividends to all the shareholders, each of them – including the board members – would only have gotten about $1000/each. That’s not peanuts, but it hardly seems worth alienating your friends and neighbors over.
In contrast, if this were a for-profit firm, someone (say me) could have bought up a bunch of shares, voted to sell the land, and pocketed the bulk of the proceeds. There wouldn’t have been any need to wait for the safety police to come along and order the deepening of the pool. The major shareholders would simply have noticed that they were sitting on an expensive asset they were never going to use.
And that’s one of the great things about for-profit firms. Unlike non-profits, they aren’t just looking to get by. They aren’t like hibernating bears who only move to get away from a cattle prod. They’re looking to get rich. And as Smith pointed out two centuries ago, that motivates them to take valuable assets that are gathering dust and sell them to other people who would truly appreciate them.
P.S. As far as non-profits go, my pool is one of the more efficient. At least it charges a market-clearing fee, so there’s no waiting list for new members. Another pool I’d much rather belong to is so under-priced that I’ll be waiting three more years to get in. What a waste.