Over time, state and local governments have passed regulations that limit entry into certain markets. For example, in most locations beauty shops and barber shops must obtain a license to do business

Question

The usual justification for such licensing requirements is to better ensure that only qualified people are offering such services. Considering the efficiency implications of having more or less firms serve a particular market, and the fact that consumers can "vote with their feet" (i.e., buy from a different if they aren't satisfied), is such regulation justified from an economic perspective? Why or why not?

Answer 1

Considering the service, hair care, and the fact that consumers can vote with their feet, the answer is No. The primary effect of such regulation is to restrict supply relative to market demand. This in turn pushes market price higher than it would be without such entry restrictions. Note that in the case where a firm does not do a good job, consumers will quit purchasing from that particular supplier. In addition, it is likely that word of mouth will discourage potential new customers as well. Overall, consumers benefit from increased supply and lower prices when restrictions on entry into this market are not present.