How can regulation create barriers to entry?

1 Answer
Nov 23, 2015

Environmental barriers, bureaucratic costs, import taxes, natural monopolies.


First, there may be environmental barriers. Suppose you have a chemical company and there is a law that forbids you to throw waste at water. Consequently, you will have to pay to have these residues treated. Moreover, this service may not be available at the place your company is located or it may be too expensive for a small company.
The regulation may also create bureaucratic barriers for some companies, charging extra taxes for them to operate in the market. Making processes flow slow also works, and they can charge extra form making things go faster.
If your entry in the market relies on importing a good, the government may establish an import tax or, even worse, import quotas. Therefore, you would need to pay an extra value to import these goods.
Lastly, the government can have a natural monopoly over a certain good defined in law. For example, in Brazil only the government can extract and refine oil. Therefore, no company can enter this market as long as the monopoly is defined in the federal constitution.