Economists use the term “market failure” to describe situations where government intervention might be warranted. It is a well-accepted concept used to justify regulation.
The term “regulatory failure” does not have a common definition, but let me suggest one: Regulatory failure is when a regulatory agency issues a regulation that is contrary to its mission. So, if the FDA issues a drug safety regulation that makes drugs less safe, then that would be regulatory failure. And if OSHA issues a regulation that makes workplaces less safe, then that would also be regulatory failure.
Impossible, you might think? Nope. It happens. Here are two current examples of regulatory failure, both from the U.S. Environmental Protection Agency.
Definition of Solid Waste. In 2011, EPA proposed to revise its definition of solid waste to prevent sham recycling (a very rare thing) and to avoid future situations where the government must cleanup abandoned waste sites where bad recycling practices once flourished. EPA proposed to do this through stringent new requirements that will increase the cost (and therefore, decrease the level) of legitimate recycling.
SNAP De-Listing Rule. Last month, EPA proposed to phase down the use of certain gases in commerce having a high global warming potential. The goal is to reduce greenhouse gas (GHG) emissions. Specially targeted is HFC 134a, a substance used in automobile air conditioners, HVAC systems, and building insulation. The proposal will, however, raise the cost (and therefore lessen the use) of building insulation---arguably the most effective product for reducing GHG emissions.
In each case, EPA conducted a cost-benefit analysis, which should have identified and quantified the problem, but did not.
The reason for regulatory failure is always a consequence of some combination of factors: statutory authority, court directives, political motivations, bad economic analysis, and inadequate intra- and inter-agency review.
Nevertheless, these two proposed rules should be changed before each is made final. To not do so risks the agency’s credibility with the public—something no agency can afford to squander.
Regulatory failure is never justified.