With market allocation consumers may ignore the benefits or costs their actions provide others. With political allocation legislators may ignore the costs that taxes and regulations impose on citizens. The efficiency of political markets determines the extent to which politicians consider the costs imposed on unorganized citizens. But whatever the efficiency of political markets, politicization is less likely to improve welfare when consumers have a relatively large stake in a decision. If the bulk of the costs and benefits of an action fall on the market decision maker, the gain from imposing regulations is small.
Drivers face a large cost from failing to properly maintain their vehicles.
Market decision makers face a strong incentive. Legislators considering a safety inspection bill bear only a fraction of the costs of this relatively obscure regulation. The scope for excessive transfers relative to beneficial regulation is likely to be large. Regression results suggest that interest group variables better explain the incidence of safety inspections across states than variables affecting safety. Furthermore, evidence indicates that a mandatory inspection program does not reduce the fatality rate.