Remedying Regulatory Diseconomies of Scale

Rules in the modern administrative state tend to lag behind reality, and a key contributor to this stickiness - the volume of regulated activity - is largely ignored. When legislators or agency staffinitially write rules to constrain the externalities of an activity, they assume that the activity will occur at a particular scale. Based on the known impacts at this scale, policymakers and regulators balance the harms of the regulated activity against the costs of regulation to industry, striking a compromise within the chosen rule or choosing to not regulate at all.If the activity later expands from this baseline, the harm/regulatory cost balance becomes precarious - the rules remain stuck at the baseline. Yet the growing activity sometimes produces more harms, including simple harms, each of which has an independent probability of occurring; these risks can accumulate. Expanding activities also can have effects with interdependent risks that expand disproportionately with the time, density, and location of activity. Finally, growing activities might generate uneven impacts, which are shouldered disproportionately by certain communities.These harms, combined with a lack of adequate public law response, produce what I call regulatory diseconomies of scale - disproportionately negative effects sometimes associated with the expansion of a long-regulated activity. But this is not a one-way ratchet: although this Article focuses on diseconomies, in many cases harms might decline with increasing scale. Industry might innovate and develop new pollution control technologies or more efficient processes, thus lowering the need for regulation. Alternatively, the scale of activity might decline, thus producing fewer harms, yet old, stringent rules remain in place. The failure of rules to respond to either rising or falling harm is due largely to scale blindness in public law - our assumption that familiar activities that we already regulate do not require substantially different remedies when the scale, rather than the nature, of the activity changes.There are clear solutions to this problem, and many of them could be applied ex ante. Laws could (and sometimes do) include harm thresholds, which impose more or less stringent controls on individual activities as they grow (or shrink) and move closer to or further from a harm threshold. Our laws also could anticipate and avoid various confluences of events - activities occurring at high densities in sensitive environmental areas, for example. Finally, regulatory institutions could be designed to automatically grow or shrink at certain levels of regulated activity. If more regulation was needed to address disproportionately expanding harms, for example, regulated actors could pay for the added cost through higher permitting fees.This Article identifies and analyzes regulatory diseconomies of scale as a core failure of the modern administrative state, using oil and gas development enabled by hydraulic fracturing and older environmental challenges as examples. It then proposes solutions, suggesting how our system of public law - and the institutions that write and implement laws - must better anticipate and address this phenomenon.INTRODUCTIONOne of the most common weaknesses of the modern regulatory state is the failure of laws or institutions to anticipate and account for the expansion or decline of regulated activities. When legislatures or agencies write a rule, they nearly always assume that the regulated activity will occur at a particular scale - that there will be one thousand factories emitting a pollutant, or one million mortgages of a particular type. Based on this assumption, legislators or agency actors limit the externalities of the activity to a level that seems appropriate in light of assumed total harms as compared to the costs imposed on regulated entities and agencies by rule implementation (regulatory costs). They might, for example, impose laxer controls on regulated actors if the regulated activity is relatively benign or regulatory costs are high. …