Answer to Question #202997 in Finance for kriti

Question

Until recently, the state of Louisiana required would-be florists to pass a difficult and subjective flower-arranging exam judged by a panel of licensed Louisiana florists. Is there an economic justification for such a regulation? Why do we observe stringent licensing laws in many sectors, including financial services?

Answer 1

Because of the benefits of the licensing system to these current florists, it is in the florists' best interests to protect it. The licensing system is one of the barriers to new businesses entering the florist sector, and thereby decreases competition.

This impediment to new businesses entering the market reduces the supply of florist labor, resulting in a drop in floral services. In comparison to the case when there is free entry of enterprises with no licensing system, which increases supply and therefore reduces prices in the marketplace, this reduction in supply results to an increase in pricing and so higher profits for the incumbent firm.