REVIEW #10: How Much Red Tape is Too Much Red Tape

The biggest barrier to the development of the Czech economy is the lack of workforce, increasing bureaucracy, poor transport infrastructure and also the increase in energy costs, increasing cost of credit in the shadow Czech National Banks policies and the pressure on wages”.

– President of the Union of Industry and Transport Jaroslav Hanák

The last time the Czech government conducted an analysis of how high and costly the bureaucratic burden was in the Czech Republic, the result was that the state required the business to meet almost 1,500 different information obligations. If this is not an example of excessive bureaucratic burden, then what is? How much regulation is too much regulation? And, by the same token, how much red tape is too much red tape?

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When one neglects the actions of despotic rulers and governments that have introduced various rules and restrictions to fulfill their (often deplorable) goals, it is possible to pinpoint the beginning of regulatory theory in the works of scholars who tried to find the answer to the question that underpins so-called “market failures”. These may be divided into the following categories:

imperfect competition, such as the existence of a monopoly;

neglect of externalities, which are mainly related to environmental issues;

issues of public goods;

incomplete information on market participants.

Needless to say, general theory works with regulation within the economy primarily because of market failures. This is because of the situation where the market allocation of economic goods is not effective.

Many pages were written about plans for reasonable market regulation. Pareto optimum regulation, which implies an improvement in the position of some market participants without any deterioration in the position of others, is an example of such a solution. By applying this measure, the regulator reaches a higher curve of social utility.

The recipe is quite simple: In its infinite wisdom, the regulator discovers market failure and its (supposed) origin. It then selects the most appropriate of its tools, whether it be different forms of taxation, licensing, bans, orders, customs, etc., and uses it to correct the situation. Simple, right?

Another example is that the aforementioned situation can be exacerbated by the fact that the regulator in all their wisdom tries to centrally plan the operation of the whole economy. However, the centrally planned economy cannot work because the central government simply does not have enough information about supply and demand in the markets and therefore has to collapse – as explained by F.A. Hayek in his works1. Clearly, the centrally planned economy does not win competition in popularity, also among “reasonable” leftist economists and other academics. Central planning is, therefore, opposed by the mainstream economy due to its dysfunctionality, which was proven by Nobel Prize winner James M. Buchanan2.

Let us mention examples of so-called “socialist paradises” such as Venezuela, Cuba, North Korea, and others where the central authority takes over the role of the market regulator and people suffer from a lack of basic goods such as food, toilet paper, medication and much more. The experience with this “enlightened” practice is also present in the countries of the former Eastern Bloc, including the Czech Republic.


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1 Hayek, F. A. (1994) The Road to Serfdom, Chicago: University of Chicago Press.

2 Buchanan, J.M. and G. Tullock (1962) The Calculus of Consent: Logical Foundations for Constitutional Democracy, Michigan: The University of Michigan Press.