What is wrong with government regulations? Well, first, of course, they are likely to be the result of special interests, and inefficient. But even good regulations have a cost that I don't see mentioned: the cost of having to act carefully so as to avoid breaking the rules. In a society with numerous regulations, people spend a lot of time learning about the regulations. How can I build a model of this?

Maybe something like this. I have to make N decisions,X1...XN, each of which is a choice of either Xi=1 (to do an action) or 0 (not to do it). I would like to do all of them, because I gain V from taking an action. The government has made M of the actions illegal, but I don't know which ones. At cost D I can discover whether a given action is legal. At cost C, I can learn one regulation--that is, learn the identity of one illegal action. I do know M. The penalty for an illegal action is Z.

If M=0, then everything is legal, I choose Xi=1 for every i. There are no transaction costs.

If M=N, then everything is illegal. I choose Xi =0 for every i. There are no transaction costs.

If M=1, then if the penalty Z>C, and if C is not much larger than D, then I pay C and learn which action is the illegal one. If Z It might be interesting to see how my decisions of what to learn and what to do change with M, and how the transactions costs change.

What I think the model might illustrate is that when lots of things are arbitrarily illegal, there are big transaction costs.

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