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Sunday, April 13, 2008

American Airlines and Captured Regulators

Recently, there was a scandal at American Airlines. The FAA determined that a bunch of planes at American Airlines didn't meet their standards. American Airlines is not allowed to fly these planes until repairs are completed.

How did the problem get this bad?

Like all government regulators, the FAA is a "captured regulator". The FAA is not an independent regulatory body. Its management is chosen by the airline industry.

An FAA inspector noticed problems in American Airlines' aircraft. His supervisor told him to ignore the problem. He would have been fired if he persisted. Why should an airline inspector risk his job to insure airplane safety?

FAA inspections protect airlines. The airlines say "The FAA inspected our aircraft. Therefore, they are safe." The superficial FAA inspections protect the airlines from liability in the event of a crash. Corporate management and the FAA's management are immune from liability when they do something wrong. This is the "sovereign immunity" problem.

Government regulatory agencies don't work. They fall prey to the Distributed Costs and Concentrated Benefits problem. The airlines have an incentive to lobby for regulations that favor them. There's nothing the average person can do about it.

In a free market, the same company that American Airlines purchases crash insurance from would also conduct airplane inspections. In that case, the incentive would be for honest inspections.

The American Airlines problem is one example of the fundamental problem. Government regulations don't work. Government regulations favor large corporations over small businesses and individuals. The industry regulated can always profitably lobby for regulations that favor it.

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