Regulation in the Federal Union

This chapter outlines the principles for the efficient regulation of market activities in a federal economy. As with the provision of public services and the assignment of taxing powers, the aim is to allocate regulatory responsibilities between local, state, and national governments so as to ensure efficient allocations. There may be too little regulation as a result of competition by local and state governments for private business and the compensating benefits for residents that those firms might provide, a competition known as “the race to the bottom.” The result will be lax environmental, competitive, or financial regulations imposing damages on residents of other localities or states. If those damages are significant and widespread, then national regulation of such activities will be appropriate. On the other hand, national regulations that preempt local regulations may restrict the ability of state and local governments to tailor their own environment or competitive marketplace to meet the specific needs of their residents. Allowing local regulatory choice that benefits only local residents and imposes only local costs, and may be copied by other states, may lead to a “race to the top.” The chapter provides a template for separating the two “races” and facilitating an informed national debate on federal regulatory policies.