Entrepreneurship is based on the freedom to compete. But in many states across the country, that freedom is being threatened by Certificate of Need, or “CON” laws.
In states that impose Certificate of Need laws, entrepreneurs are not only forced to seek permission from the government to start a business, they must also get the permission of their potential competitors. After an aspiring business owner applies for a license in the state, the relevant state agency must then notify every single business in the industry—ie. the potential competitors.
Once notified of the application, the existing businesses can protest for any reason, including the bare reason of not wanting new competition. Once lodged, a protest makes the Certificate of Need application process exponentially more burdensome for entrepreneurs. A protest triggers a government hearing where the entrepreneur must prove that his or her business is “necessary.”
But proving in a hearing that one’s products or services are necessary is an uphill climb. How can entrepreneurs prove that their products or services—especially new and innovative ones—are necessary when they can’t offer them in the first place and find out? Only experimentation can help them show that their business is necessary. No amount of government hearings—which tend to be expensive and onerous—can help them “prove” the necessity of their business before they can actually open their doors.
Worse, existing businesses can testify at hearing that a new business is not necessary, because they are able to service any existing demand. Protests almost always end up in the applicant being denied, essentially giving existing businesses a “Competitor’s Veto” over who enters the industry.
When consumers are responsible for picking which businesses win or lose, entrepreneurs are forced to innovate and cater to consumer demand if they want to stay in business. Competitor’s Veto laws allow existing businesses to choose who wins or loses, stifling innovation and trampling on consumer choice.
The purported purpose of Certificate of Need laws is to ensure that the right amount of businesses exist within a given industry, such that “dog eat dog competition” doesn’t force everyone to flee the market, or that “excessive entry” won’t result in too many businesses, over-investment, and higher prices. But in practice, these laws don’t involve some sort of complicated economic analysis. Instead, the government allows existing businesses to determine who should get the privilege of competing.
Because they act as a favor to entrenched industry insiders, Competitor’s Veto laws violate the Constitution’s promise of economic liberty, that is, the right to earn a living free of irrational government interference. Using regulatory power as a handout to established businesses has no relationship to protecting public health or safety; it’s economic favoritism, pure and simple.
Fortunately, states are increasingly recognizing that CON laws raise costs, stifle demand, and burden entrepreneurship. Missouri, Montana, Oregon, West Virginia, Pennsylvania, and Kentucky have eliminated Certificate of Need laws in the transportation industry following lawsuits on behalf of entrepreneurs.
We can only hope that all states with Competitor’s Vote laws do the same.
In a free market, entrepreneurs and consumers are free to make choices for their mutual benefit. We can return to that system by simply by encouraging and embracing competition, and repealing Competitor Veto’s laws.
About The Author
Anastasia Boden is a senior attorney in Pacific Legal Foundation’s Economic Liberty Project, where she challenges anti-competitive licensing laws and laws that restrict freedom of speech.
