How Should Government Regulate Questionable Products and Services?

Philip Kotler

Among the millions of products and services produced each year, some are frequently questioned about their healthfulness, safety or morality. Take a look at the map showing the degree to which different states are involved in such questionable products as alcohol, tobacco products, casinos, racing, and video gaming/pari-mutual (Source: “Mapping Sin Tax Revenues Across America [MAP],” June 7, 2016, by Valuewalk Staff).

We will mention these and other products and services and ask whether they should be regulated or even prohibited. If they are to be regulated, what are the main tools that society can use to regulate these questionable products and services?

Four Types of Questionable Products and Services

We can distinguish four types of questionable products and services:

· Addictive products harmful to health: cigarettes, alcohol, hard drugs (called vice products),

· Products or ingredients whose excessive use leads to obesity and other health problems (sugar, salt and fat),

· Products raising issues of safety: automobiles, motorcycles, guns, ladders

· Services offensive to morality: gambling, prostitution, pornography.

Before examining these classes of products, we need to acknowledge that some people see any regulation as anathema to the concept of a free market. Each product or service has users who are making a free choice to buy and use that product. Most users know of the product’s potential harmfulness and are either unable to resist or comfortable with the consequences of using it. On these grounds, libertarians could object to any product regulation or banning. They prefer free choice. We will keep this issue of free choice versus regulation in mind as we review these products and services.

Addictive Products Harmful To Health: Cigarettes, Alcohol, Hard Drugs

This class of products — “alcohol, cigarettes, hard drugs” — has been loosely called ‘sin’ or ‘vice’ products. These are viewed by most people as “unhealthy products and services” deserving some level of social control. The government — whether in a city, state, or nation — might be encouraged to ban, tax, or “scandalize” them to reduce their consumption. The issue is if, when and how should governments undertake to reduce the consumption of these ‘sin’ products and services.

We know that regulating ‘sin’ products poses a contentious challenge. Just read the tragic results of the U.S. Congress ratifying the Eighteen Amendment in January 16, 1919 to prohibit the manufacturing, transportation and sale of intoxicating liquors. Alcohol went underground. It was available in speakeasies, private clubs, brothels, and thousands of other locations. Many citizens showed their contempt for the law by imbibing alcohol whenever they could do so safely. City police would often break in and arrest sponsors and participants, but many more underground venues would sprout up to take their place. The worst thing was that liquor production and distribution fell into the hands of criminals. Bootlegging of alcohol became ever more lucrative. Criminals made so much money that they could bribe politicians and mayors to carry out their “wishes.” Prohibition finally ended 13 years later with the ratification of the Twenty-first Amendment that repealed the 1920 Eighteenth Amendment on December 5, 1933.

Consider the endless effort to put an end to cigarettes and smoking. Tobacco companies for decades glamorized smoking and challenged the claims that smoking was harmful. When the evidence of cigarette’s harmful effects to the heart and lungs became irrefutable, tobacco companies had to retreat and state on the cigarette package that smoking could be harmful to one’s health. Anti-cigarette groups successful applied a number of tools to reduce smoking, including creating anti-smoking cures, passing higher taxes on cigarettes, circulating photos of dying smokers, and prohibiting indoor smoking in offices and public places. Efforts were made to legally sue tobacco companies to pay for the health injury that various smokers experienced and use the money to intensify anti-smoking efforts.

Hard drugs — marijuana, heroin, cocaine, and others — are extremely addictive and harmful to one’s health. These drugs have been the most resistant to social control. Powerful gangs in Mexico and other locations monopolize these drugs, ship them to locations of high consumption such as the U.S., make enormous profits, and use these profits to bribe officials. These gangs do their best of launder the money so that it comes out as new legitimate-looking businesses. In the meantime, federal and state officials are arresting suppliers and heavy users of these drugs, filling up our prisons and requiring the building of additional prisons. This anti-drug policy has been a failure and a tragedy in many ways. This realization has lately led to a softening of anti-drug enforcement, Much came about with manijuana becoming recognized as a helpful medical drug in a number of cases. Some states — California, Colorado among them — allow businesses to be formed to provide cannabis either medically or even for more general use.

Products or Ingredients Whose Excessive Use Leads To Obesity And Other Health Problems: Sugar, Salt And Fat

In the United States, most products sell without regulation. However, in the case of food and drinks, we need some regulation. Food safety and quality is governed by approximately 30 federal laws and regulations administered by 15 federal agencies. The Food and Drug Administration (FDA) and the U.S. Department of Agriculture (USDA) share primary responsibility for overseeing the safety of our food supply.

More recently, a class of familiar and common products has drawn increasing attention as being harmful to our health if used in excess. There are foods that use too much sugar, salt and fat that clearly contribute to the growing obesity problem in the U.S. and in many other parts of the world. Obesity can lead to a number of illnesses, including heart disease, stroke, high blood pressure, diabetes, some cancers, gallbladder disease and gallstones, osteoarthritis, gout, and breathing problems. Some of the firms may try to deny that they problems exist but the evidence is strong that the heavy consumption of sodas, candy, ice cream and a number of other food products can be harmful to long term health.

Berkeley, California ran a successful campaign in 2014, calling it a fight against “big soda.” Their proposal won over 76 percent approval. Today the anti-sugar movement is spreading across the country. Some battles will be lost — that was the case in El Monte and Richmond, California. One reason is that the beverage industry spends millions of dollars on lobbyists to defeat these taxes.

Probably the most recent well-publicized episode of regulation was carried on by New York City’s Mayor Michael Bloomberg. He initially pushed through a sales tax on large size (over 16 fluid ounces) soda bottles. In 2016, New York City passed a new sugar tax that affected every sugary drink. Bloomberg wanted companies that produced drinks like Coca-Cola, Gatorade and tonic water to work hard to reduce the amount of sugar in their recipes.

Those who opposed this tax argued that the tax fell heavily on the poor who were the heavy users of soft drinks, especially large size ones. The critics argued that the tax didn’t really limit consumption and only made the poor poorer. The beverage industry has claimed that many jobs of bottlers, truck drivers, and ad people might be lost if many people shift to drinking water or “safer” beverages. We can discount this because safe beverages also require bottlers, truck drivers, and ad people.

As early as June 2010, Washington state legislators decided that candy, gum, and soda had to pay taxes. But the taxes typically have been small and not effective in driving down America’s thirst for sugary drinks. Higher taxes might be necessary to effectively discourage high consumption.

In 2015, the U.S. House Ways and Means Committee proposed a provision that would tax soda and candy. This measure was not passed, however.

“Obesity” taxes are more prevalent in Europe. The Danish government has taxed candy for nearly 90 years! And Denmark was the first country in the world to pass a law banning trans fats, with Austria and Switzerland following closely after.

Romania considered passing a “fat tax”, expanding beyond sodas and candies and trans fats to hit “junk food” more broadly. The “fat tax” revenue would be used to fund investments for improving healthy behavior and the healthcareb system.

Today Hungary is probably the most active European country trying to reduce the consumption of foods with high fat, salt and sugar content. Hungary imposed special taxes because of the country’s 18.8 percent obesity rate, which is more than 3 percent higher than the European Union average of 15.5 percent. Adult obesity In Germany is 13.6 percent and as low in Romania as 7.9 percent.

Hungary’s obesity is no surprise when you consider their pastry. Hungary’s best known treat after goulash is the dobostorta cake, a five-layer vanilla and chocolate buttercream dessert with a caramel-glazed top layer. Hungarian food uses cooking ingredients such as pork and goose fat and pieces of pure lard.

The Hungarian government argues that foods high in fat, sugar and salt need to be taxed to discourage their consumption and to provide money to pay for increased medical and hospital costs. The “fat tax” includes soft drinks with added sugar, energy drinks with added sugar and caffeine, pre-packaged sweetened products, salty snacks, high salt content condiments, soup mixes, gravy mixes and bases. The “fat” tax is to fall on those who live unhealthy lives.

The real point of “demarketing” is to raise people’s consciousness that what they eat or drink shapes their lives and health. We can’t leave it to one-sided messaging that “glamorizes” these sugared or artificially-sweetened drinks. We can use “demarketing” to stigmatize or “deglamorize” drinking these beverages.

Products Harmful To Safety: Automobiles, Motorcycles, Guns, Ladders

Regulation has also been applied to manufacturers and users of “equipment products” that need to be used carefully to avoid injury. From the earliest days of automobiles, cities and states passed legislation to insure that cars were made safely. Car speed was limited, tires had to be made of good quality, and the various mechanical parts of the car had to pass certain tests. Attention was also directed to regulating who could get a driver’s license. One’s license can be cancelled for reckless driving, drunk driving, poor vision, or old age. Most members of the public readily accept and want these regulations.

As motorcycles became prominent, legislators addressed the question of the noisiness of motorcycles and whether motorcycle owners had to wear a helmet. States and cities have differed greatly in their regulations. Motorcycle owners have often challenged the helmet law and believed that they should have free choice. Critics however point to the large number of motorcycle accidents and the high public cost of repairing those who are injured.

The big regulatory issue today centers on the rights of gun owners. The National Rifle Association (NRA) would want everyone to have one or more guns of any kind to be carried in any place, including restaurants, schools, churches, movie theatres, among other venues. The fact that students in 18 different schools in the U.S. have lost their lives in recent years due to crazy or mentally ill shooters has once again driven public demands for regulation. The initiatives include prohibiting the sale of guns to persons under 21 years of age, testing the mental fitness of any gun buyer, limiting or preventing the purchase semi-automatic assault guns (such as AR-15s), and restricting or preventing carrying a gun in certain in certain spaces or places. An extreme position would be to prohibit the ownership of guns by private individuals. This is the case in some American cities and in some European countries. The problem is that the Second Amendment to the United States Constitution protects the right of the people “to keep and bear arms”. Yet In 1991, former Chief Justice Warren Burger said that the idea that the Second Amendment recognizes an individual right to gun ownership was “a fraud” on the public. The arguments for and against gun ownership are likely to go on for a very long time before any legislation settles the issues.

Many other types of equipment are regulated. There is extensive regulation of equipment in factories that can cut or maim workers. Even the familiar ladder carries a large number of regulations by Osha (Occupational Safety and Health Administration) regarding size and construction of step ladders and extension ladders.

Services Offensive To Morality: Gambling, Prostitution, Pornography

A growing share of our national output comes in the form of services rather than products. Just think of workers involved in retailing, restaurants, beauty services, air and ship travel, and other service occupations. Three particular services have received moral condemnation over the years. They are gambling, prostitution, and pornography.

Gambling. A large number of people are addicted to gambling, even though they know that the odds of winning are stacked against them. Gamblers include grandmas who sit all day putting coins into “one-arm bandits” hoping for a jackpot. Other gamblers play poker, blackjack, dice games and many others for money. They populate casinos in Las Vegas, Atlantic City, and an increasing number of other American cities. Gamblers with more money are likely to travel abroad to casinos in Macau (China), Monte Carlo (Monaco), Paris and other locations. Some of them are willing to stick around a casino until 4am along with other addicts. They think their lives are more interesting than those of rational, boring people whose lives revolve around their work, children and pets.

Given that gamblers enjoy gambling, what is the moral case against gambling. If wealthy persons lose a lot of money in gambling, they still have a lot of money left. But if average income family persons spend a lot of money gambling, they risk having less money left to feed their families. Ironically, they are gambling in the hope for a jackpot to escape their low income. But most of them just lose money, many turn to drink, and wreck their marriages. The moral opprobrium arises from the harm they do to their families.

Some cities have laws against gambling or prohibit casinos, horse racing or dog racing from entering their city. Yet casinos are appearing in more cities using the argument that they can donate a percentage of their earnings to fund the school system or some other important causes. Ultimately, we can hope that fewer people get caught up in gambling and that therapists find more effective cures to help gamblers give up their addiction.

Prostitution. Every nation faces the problem of prostitution and how to regulate it. At one extreme, prostitution can be outlawed and prostitutes and their clients can be jailed. Or they can be fined and given a warning of jail if caught again. Or the city can leave it alone as something they cannot control. Or the city can limit prostitution to one location out of sight and regulate it by requiring prostitutes to register and have frequent checkups to prevent sexual diseases from spreading.

The moral opprobrium is based on the notion that prostitutes are only making their bodies available out of desperation. They sell their service for money either because they cannot find any work or any work that pays as much as they can earn through prostitution. The belief is that these women do not want to be prostitutes, they don’t enjoy selling their sex, and they are clearly being exploited. Prostitution is an example of a service activity that begs for some kind of regulation.

Pornography. The publication and distribution of pornographic writing and nude pictures has a long history that goes way back to ancient times. The arrival of the movie industry in the 1900s gave it a further platform. Theatres showing pornographic films was outlawed for a long time. The arrival of Playboy magazine in 1953 gave pornography a more public face and degree of acceptability. Some respectable major companies were even placing their ads in Playboy magazine because it had a five million circulation. Then pornography heated up with the debut of Penthouse magazine in 1965 and heated up further with the debut of Hustler magazine in 1974 that was clearly pornographic.

With the advent of DVDs and the Internet, pornographers rushed to make films and develop TV networks featuring pornographic films. Now teen agers and others could gain easy access to view heterosexual, gay and other forms of sex. The fear is that this viewing familiarity will excite more people to seek sex or engage in sexual acts. The idea of romantic love, of loving someone for themselves and not making it conditional on sexual favors, dissipates in the presence of such pornographic experiences.

Should the nation try to reduce pornography by confiscating all film, setting high fines or jail sentences on pornographers, or remove all pornography from the Internet if this is possible? Today the sexual act takes place in many movies and network TV shows. Even if it could be banned or curtailed, pornography will continue to appear in books and magazine articles. Do we want to repeat the time when books like Lady Chatterley’s Lover by D.H. Lawrence was banned? Or should we just ignore pornography?

Policy Options in Regulating Questionable Products and Services

We described many questionable products and services that governments might target for demarketing and deconsumption.

We need to ask the following three questions:

1. Should government engage in discouraging the consumption of certain products and services?

2. What are the most effective tools for reducing the consumption of questionable products and services?.

3. How successful is government control efforts likely to be?

Should government engage in discouraging the consumption of questionable products?

The case for demarketing questionable products and services is that they harm the user and very often others around the user. The prohibition of liquor beverages in 1920 aimed to reduce the growing problem of drunkenness. A drunk was in danger of hurting himself or herself and hurting others by driving while drunk or beating their spouse. The problem of eating unhealthy food is that it produces more illnesses and shortens the lives of their consumers. This not only hurts the individual but hurts his or her family and will raise medical and hospital costs.

However, those against government regulation of questionable products see regulation as deeply interfering with personal freedom of choice. They would want people to freely eat what they like and be responsible for the consequences. They argue that when a person wants some food or drink item, if they don’t get it, they can become very depressed or troubled. They may go underground to get the products that are banned. This can raise the prices of banned products and lead to increased criminal activity.

There are critics don’t want the government to act as a ‘nanny.’ Yet the same critics say that it is okay for companies to aim their advertisements at children and build childrens’ interest in eating sugary products. Why can’t government try to regulate these commercial messages? The critics worry that the government will expand their regulations to cover more and more consumption activities. Government may tell us not to eat steaks because this can injure a person’s heart or because cattle are a big factor in polluting our atmosphere? Will the government discourage attendance at football games to reduce the number of head concussions? This “slippery slope” argument is often raised.

Generally, every regulation proposal has to be discussed on its merits. Some level of social control will occur when there is high citizen consensus favoring control and high social cost of damage when the control is missing. Normally the government will pay attention to the percentage of local citizens favoring or opposing social control. In 2013, a Harris Interactive/Health Day poll showed that twice as many people were against government taxes on sugar drinks and candy. Two-thirds agreed with the statement, “It should not be the role of government to influence what we eat and drink to make healthier choices.” This type of finding will help those who oppose regulation. An opposite finding would help those who favor regulation.

What are the most effective tools for reducing the consumption of questionable products and services?

Four major tools are available to discourage the consumption of questionable products and services.

1. Banning. Banning involve passing a law that makes the production and distribution of a product or service illegal. We have seen this applied to alcoholic beverages in the “prohibition era” and to hard drugs in the “criminalizing era.” What is clear is that banning doesn’t work when the product is very pleasurable or addictive or both. Users will do almost anything to get the product. Many will be fined or jailed. The product will go “underground.” There is a danger that banning will glamorize the “forbidden fruit.” In the past, when a book such as Henry Miller’s Tropic of Cancer was banned, it had the effect of increasing the public’s interest in reading the book.

2. Taxing. Many government agencies chose to levy a tax on a questionable product. For example, Hungarians pay an extra 25 percent tax on certain questionable foods and drinks. The new tax hits low-income groups the hardest because they consume more of those foods and drinks. If Hungarian consumers decide to shift away from the taxed food and drink, they may end up eating less or eating at a higher cost level.

The tax creates a new revenue source for the government. If the government sets the tax too low, it would not reduce consumption by very much. If they set the tax too high, consumption can decline substantially and the tax revenue will be lost. Most government try to set a tax at a level that it will continue to generate revenue, even if it doesn’t reduce consumption by very much.

3. Raising the channel cost of getting the product. The government may take steps to limit the physical availability of the product. The Swedish government runs the liquor stores and limits the number of stores so that consumers may have to go far to get liquor. The government also limits the buyer to purchasing only one bottle of liquor each week. In the United States, mayor Michael Bloomberg wanted to require stores selling cigarettes to hide the cigarettes behind a door making them less visible and making the consumer wait a little longer for the product.

4. Anti-product campaigns. Governments might require special packaging of questionable products. Cigarette companies may have to include a health warning on the packaging and even show a picture of a person suffering from some disease resulting from heavy smoking. Government or nonprofit groups can hire an advertising agency to develop a social marketing campaign that describes all the ill-health effects of smoking. Canada sponsored an active demarketing campaign against hard drugs using the motto “Say no!” Social marketers can develop several campaigns for different users, test them, and continue to show the more successful campaigns.

How successful are government control efforts likely to be?

We have seen that each of the four regulatory methods have their limitations. The stronger the consumption habit and the consumer insistence of continuing with the consumption, the lower the likely success rate will be.

A nation, state or city should recognize that consumption habits are formed early and therefore good consumption guidance should begin early. Sweden and Canada are two countries that work hard to encourage parents to raise their children early on healthy eating and drinking habits. Parents raise their children to enjoy vegetables and fruit as an important part of their diet. Parents are made aware of the obesity danger of their kids consuming too much sugar, salt, and fat. Parents have actively discouraged the consumption of alcohol, hard drugs and cigarette smoking. A nation that succeeds in raising the children in the right way will have little need for campaigns against questionable products.