# does this explain the whole conservative/ liberal ideological divide? **URL:** \ **Category:** Great Debates\ **Created:** [March 12, 2009, 6:29pm UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236 "2009-03-12T18:29:58Z")\ **Posts on this page:** 20\ **Page:** 4
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [March 13, 2009, 3:23am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/61 "2009-03-13T03:23:50Z")
> [@IdahoMauleMan](#): > > It is extremely unlikely that many, many people would buy bad bread and become very sick or die simultaneously. The news would spread too rapidly. In the interim, successful companies who don’t kill people can build their brands and reinforce their success via word of mouth and positive reviews. You may note that I was not discussing outright adulteration. ---
**Author:** ![Kimstu](https://avatars.discourse-cdn.com/v4/letter/k/ecd19e/32.png) [@Kimstu](https://boards.straightdope.com/u/Kimstu)\ **Post date:** [March 13, 2009, 3:25am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/62 "2009-03-13T03:25:56Z")
> [@IdahoMauleMan](#): > > It is extremely unlikely that many, many people would buy bad bread and become very sick or die simultaneously. The news would spread too rapidly. In the interim, successful companies who don’t kill people can build their brands and reinforce their success via word of mouth and positive reviews. But like **erislover** with his “destroying the food market” comment, you’re able to make a point here only by wildly overdramatizing and misrepresenting the situation that’s actually being discussed. Nobody’s talking about the food market being destroyed. Nobody’s talking about poisoned bread killing large numbers of people. The example of economic inefficiency that **BrightNShiny** mentioned was the much less dramatic fact that when food products don’t have labels, consumers don’t know what ingredients are in them. This is an information asymmetry that decreases economic efficiency, and is partially corrected when food products are labeled. Simple as that. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [March 13, 2009, 3:26am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/63 "2009-03-13T03:26:07Z")
> [@IdahoMauleMan](#): > > P2. Of course there is no guarantee. There is no guarantee of anything. What’s your point here? That it would be great if X happened, so let’s get the government involved to try and make X happen? It would be great if the market could work better, but it won’t always happen on its own. > [@](#): > > P3. Proof by assertion isn’t very persuasive. Could you help me try and understand? We are trying. ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [March 13, 2009, 3:27am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/64 "2009-03-13T03:27:14Z")
> [@Kimstu](#): > > Sorry, but you can’t expect other people to abide by the idiosyncracies of the unique **IdahoMauleMan** dictionary, so you need to keep your wet noodle to yourself. Laws against fraud are part of legal regulation, and that designation is an entirely normal part of standard English usage, as seen in the following examples: > > . Fine. I hereby concede that I will apply the label of ‘regulation’ to laws that prevent force or fraud. I, IdahoMauleMan, do hereby concede that the term ‘regulation’ can be applied to laws that prevent force or fraud. I am generally against all other forms of regulation except for this one. But since this too is technically a regulation, I can’t be against _all_ regulation. I admit this and apologize for any confusion this may have caused. Signed, IdahoMauleMan 12 Mar 2009 ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [March 13, 2009, 3:27am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/65 "2009-03-13T03:27:16Z")
> [@Kimstu](#): > > But like **erislover** with his “destroying the food market” comment, you’re able to make a point here only by wildly overdramatizing and misrepresenting the situation that’s actually being discussed. Either that or you have no idea what I was saying. ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [March 13, 2009, 3:28am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/66 "2009-03-13T03:28:46Z")
> [@erislover](#): > > It would be great if the market could work better, but it won’t always happen on its own. > > We are trying. Please keep trying. The guy wants to sell his painting for $4. The buyer is willing to pay $5. But appraisers cost $2. So the transaction doesn’t happen. This is a market failure? How do you know it isn’t a market success? ---
**Author:** ![Kimstu](https://avatars.discourse-cdn.com/v4/letter/k/ecd19e/32.png) [@Kimstu](https://boards.straightdope.com/u/Kimstu)\ **Post date:** [March 13, 2009, 3:30am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/67 "2009-03-13T03:30:58Z")
> [@erislover](#): > > Either that or you have no idea what I was saying. Maybe that. Why **did** you bring up the point about food markets not being destroyed, then? ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [March 13, 2009, 3:31am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/68 "2009-03-13T03:31:31Z")
> [@Kimstu](#): > > But like **erislover** with his “destroying the food market” comment, you’re able to make a point here only by wildly overdramatizing and misrepresenting the situation that’s actually being discussed. > > Nobody’s talking about the food market being destroyed. Nobody’s talking about poisoned bread killing large numbers of people. The example of economic inefficiency that **BrightNShiny** mentioned was the much less dramatic fact that when food products don’t have labels, consumers don’t know what ingredients are in them. This is an information asymmetry that decreases economic efficiency, and is partially corrected when food products are labeled. Simple as that. No it’s not as simple as that. The overall economic efficiency increase (or decrease) needs to weigh all of the costs and benefits involved. You are merely asserting that economic efficiency has increased. I’m almost certain that it hasn’t, if careful analysis is applied to the situation. There was a similar argument presented in the FDA thread a few weeks ago. I threw out a few numbers back then to weigh the costs and benefits of regulation. I’m happy to revisit that if you would like to take the time. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [March 13, 2009, 3:32am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/69 "2009-03-13T03:32:20Z")
It is not a market failure exactly as you have described it. It is a lamentable position where a trade beneficial to both parties doesn’t happen because of information asymmetry. When this situation cripples entire markets, then it is a market failure. ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [March 13, 2009, 3:34am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/70 "2009-03-13T03:34:15Z")
> [@Kimstu](#): > > But like **erislover** with his “destroying the food market” comment, you’re able to make a point here only by wildly overdramatizing and misrepresenting the situation that’s actually being discussed. > > Nobody’s talking about the food market being destroyed. Nobody’s talking about poisoned bread killing large numbers of people. The example of economic inefficiency that **BrightNShiny** mentioned was the much less dramatic fact that when food products don’t have labels, consumers don’t know what ingredients are in them. This is an information asymmetry that decreases economic efficiency, and is partially corrected when food products are labeled. Simple as that. It’s not wild overdramatization at all. It’s an exact parallel with how the FDA was first launched, as described in Sam Stone’s OP a while back. A group of people died. There was a cry to ‘do something’. The government set up a monopoly appraisal organization that has imposed enormous costs on the industry. And in that thread, the argument was made that the benefits didn’t come close to justifying the costs. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [March 13, 2009, 3:36am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/71 "2009-03-13T03:36:55Z")
> [@Kimstu](#): > > Maybe that. Why **did** you bring up the point about food markets not being destroyed, then? To explain why the solution would not come from the market itself. Or to attempt to, anyway. The point was that the food market wasn’t being damaged by the asymmetry, so there was no impetus to “fix” what was only a problem for informed choices by consumers. This is not the case with used cars, so something like carfax would exist quite naturally on its own when the technology became practical (which was quite quickly, relatively speaking). Hopefully we can get back to agreeing now. ---
**Author:** ![BrightNShiny](https://avatars.discourse-cdn.com/v4/letter/b/7bcc69/32.png) [@BrightNShiny](https://boards.straightdope.com/u/BrightNShiny)\ **Post date:** [March 13, 2009, 3:44am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/72 "2009-03-13T03:44:24Z")
> [@IdahoMauleMan](#): > > Thanks for taking the time to post. > > I notice you jumped straight to ‘regulations’ that prevent fraud. 40 lashes with a wet noodle for you. No I didn’t. I used a fraud example to illustrate the concept of economic efficiency, because it’s an easy example to illustrate the concept. Unless you are talking about my calorie labeling example. This is actually not a fraud regulation, since having no label on the soup can isn’t fraudulent. > [@](#): > > Fraud law is something that attempts to ensure that if seller promises X, seller delivers X. Your argument is that somehow government must step in above and beyond these laws and certify that yes, indeed, the seller is delivering X. Otherwise no transactions would take place and commerce would suffer. This is not what I said at all. I never said that “no transactions” will take place. Some won’t, some will. However, a system which lacks regulations designed to prevent or limit economic efficiencies will have transactions that are inefficient. And each inefficient transaction destroys a little of the wealth of the economy. If you have a very large number of highly inefficient transactions, then you will have an economy that tends towards wealth destruction. > [@](#): > > There are a few arguments against this: > > 1. There are laws to protect people from fraud. You could argue that yes, IdahoMauleMan, that’s true…but is that enough of an insurance policy for a potential buyer to feel comfortable and to generate commerce? Fine. Let’s move on to the next one. This is not an either-or situation. It’s not that you either get a whole bunch of transactions or no transactions at all. This a really strange way to think of economics. > [@](#): > > 1. Appraisals and insurance are a cost of doing business. If you choose not to buy them, you are balancing the risk of getting hosed and/or not having fraud laws protect you vs. the benefit of buying the painting at the offering price. There’s another concept called “[transaction costs](http://en.wikipedia.org/wiki/Transaction_costs).” A transaction cost is the cost of “doing business.” The higher the transaction costs, the lower the number of transactions that will take place. In theory, you could have transaction costs so high, that no transactions take place. In the real world, this doesn’t happen, because transaction costs are subject to the same competitive pressure as everything else. But, one way to look at things like fraud regulation, is that such regulation places a very high transaction cost on fraudulent transactions. And indeed, we see in the real world that when there is a law or regulation banning something, the number of those transactions has a tendency to go down after the ban (addictive drugs is an interesting counterexample to this, but that a whole other complicated discussion and I’d prefer not to get too far afield from the main points I’m trying to make). As transaction costs get higher, there will be a tendency for less transactions to take place. > [@](#): > > And if you don’t buy it, what might the seller do? Just sit there and say ‘Shucks, I can’t sell my painting at $4. I guess I’ll starve’. He can lower his price. He could pay a fee to an appraisal company - let’s call it the Bright & Shiny Appraisal Company - to inspect it and put their stamp of approval on it. > > The fee could be small, since the B&SAC has developed a good reputation for appraisals and does a lot of business all over the world over which it can spread its costs. Fees are low because there are other appraisal companies in a vigorous, competitive market. B&SAC does good work, but they have to keep on their toes and keep costs down otherwise work will go to other appraisal companies. Now this is opposite basic capitalist theory. Fees, or any good or service, all have a lower limit on how cheap they can be, which is something called the [marginal cost](http://en.wikipedia.org/wiki/Marginal_cost). If the marginal cost of appraisal is too high, then you shouldn’t hire the appraisers. You have an implicit assumption here that fees can go indefinitely low enough to make appraising viable, and that’s simply not the case in the real world. > [@](#): > > Unfortunately, in many markets the government has enforced a monopoly on its own appraisal services or has crowded out other, potential private sources. The FDA and CPSC come to mind. I say fortunately. These organizations didn’t arise in a vaccuum. They arose because of specific instances of market failure. > [@](#): > > 1. If there are many, many transactions via this seller, there would likely be on-line or other consumer appraisal systems to give feedback on his performance and honesty. EBay does billions of dollars worth of transactions each week without the government stepping in to ‘ensure’ every seller verifies what they’re doing. How does that happen? It should be massively inefficient, shouldn’t it? At least according to your theory. But in fact, its the opposite. It has exploded into one of the most liquid, efficient markets in the history of mankind. Hmmmmm… Ebay is a market like every other market in the US (online or not), and every seller there is subject to the exact same governmental regulations that everyone else is. Ebay has also set up its own additional regulations for using its website, and those regulations are backed by government regulation as well. This is not an example of what you are claiming it is. > [@](#): > > Do you think each of the ‘millions’ of consumers who stood in line to buy the first iPhones hired a testing laboratory to test the battery life? No, which is exactly my point. Because the government requires Apple to test the iPhones and to assume responsibility for the iPhones if they are defective, people don’t have to go hire their own testers, the transaction costs are lower, and more iPhones get sold than otherwise would have. And the transaction of buying an iPhone is more likely to be economically efficient, which is more likely to create wealth. > [@](#): > > Did everybody who tried that little restaurant in Cancun send food samples back home first, to test for E Coli? No. But if they got sick, then the transaction would have been inefficient and destroyed some of the wealth of the economic system. > [@](#): > > How about picking up the latest edition of the New Yorker in the airport? Do you quickly flip through it first, to make sure all the pages are filled with writing and they aren’t trying to jip you by stuffing blank pages in there? No, because the government requires the New Yorker to make a reasonable effort to ensure that the pages aren’t blank pages and to refund my money if they are. > [@](#): > > Why do you make those buying decisions? Is it because the US government is stepping in to correct information asymmetry for you? Yes. My risk of getting blank page New Yorkers is reduced precisely because the government requires the New Yorker not to sell me blank pages while claiming that it is the New Yorker. > [@](#): > > Do you know those unlicensed Arab taxi drivers who hawk rides at airports on the East Coast? I see the same guy every time I land at Newark. I’ve seen him for years. But he, theoretically, shouldn’t be there. It’s against the law. There are regulations against it. Why do you think he shows up? For his health? Am I to believe he has never had a paying fare in the 3+ years I’ve seen him, yet he keeps coming back day after day, giving it the old college try? Why else would he be there? It’s because people are weighing the risks and rewards of doing business with him, and acting accordingly. Come to think of it, the mere fact that he’s there all the time is probably a good source of feedback and consumer data…to the positive side. He wouldn’t be there if he wasn’t making money. My point is NOT that transactions will suddenly disappear. My point is that inefficient transactions reduce the wealth of the economic system, and that inefficient transactions have a tendency to lower the overall number of transactions that will take place. > [@](#): > > There is information asymmetry everywhere. You are mentally calculating the cost of risk vs the price of the good and it’s potential utility at all times, whether you realize it or not. Saying the government must step in as a monopoly provider of ‘resymmetrizing’ is ridiculous. It’s only ridiculous if you’re not a capitalist. ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [March 13, 2009, 3:44am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/73 "2009-03-13T03:44:50Z")
> [@erislover](#): > > It is not a market failure exactly as you have described it. It is a lamentable position where a trade beneficial to both parties doesn’t happen because of information asymmetry. When this situation cripples entire markets, then it is a market failure. It’s only beneficial to the buyer if the benefits \>= price. Then value is created. But in this example, the buyer is apparently very worried about fraud and needs to mitigate the risk of it. His risk tolerance is low. That has a cost. Other people’s risk tolerance may be higher. That imposes less of a cost. You can put ‘risk mitigation’ values on the benefits side of the equation above, or ‘cost of risk’ values on the price side above. You just need to be sure the signs are correct. So in this example, the buyer needs to mitigate the risk of fraud to ensure the benefits justify the price. The cost of that risk mitigation is $2. That’s too high. Therefore, the transaction doesn’t happen. After that, it was asserted in the post that somehow the government swoops in and mitigates risk for less than $2, which is the going rate in the private, competitive market. How the government can beat the private market for cost of appraisal is unclear. It’s also unclear how there are no costs imposed on the seller as part of a verification process, much like the FDA imposes on drug and food companies. Since the seller needs to spend time and resources on this verification process, it drives the price of his painting up to $5 or $6. Kind of like the $1 billion it takes to bring a new drug to market. Furthermore, the ‘efficient’ government model assumes a one-size-fits-all risk profile for potential buyers. The government’s appraisal product is it, and only it. Even though there are buyers with widely varying risk tolerances. There may be buyers who are willing to eyeball the thing and go with their gut. $4 is fine for them. But it won’t be, will it? That is, if the government steps in and forces its appraisal scheme on all buyers. Then they will have to pay that cost, either directly or indirectly via higher prices, even though they have no use for the extra risk mitigation measure. In short, you’ve picked arbitrary numbers out of thin air that assume the government will operate more efficiently than the private market, that no costs are imposed on the seller, and that all buyers have similar preference profiles. Then you’ve moshed them together to ‘prove’ a market failure, instead of recognizing that your own numbers, as well as the success of real companies like EBay, carfax, etc. actually prove it’s a market _success_. But don’t feel bad. There are about 535 people like you who do the same thing every day in Washington, D.C. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [March 13, 2009, 3:47am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/74 "2009-03-13T03:47:12Z")
> [@erislover](#): > > It is not a market failure exactly as you have described it. It is a lamentable position where a trade beneficial to both parties doesn’t happen because of information asymmetry. When this situation cripples entire markets, then it is a market failure. Well I suppose technically this is a market failure, but the context of the question is about government intervention to correct market failures, and that, obviously, isn’t on the table for random pareto efficient optimizations. ---
**Author:** ![Kimstu](https://avatars.discourse-cdn.com/v4/letter/k/ecd19e/32.png) [@Kimstu](https://boards.straightdope.com/u/Kimstu)\ **Post date:** [March 13, 2009, 3:48am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/75 "2009-03-13T03:48:07Z")
> [@IdahoMauleMan](#): > > The overall economic efficiency increase (or decrease) needs to weigh all of the costs and benefits involved. You are merely asserting that economic efficiency has increased. Careful: what I asserted is that a **particular** economic **in** efficiency was reduced by food product labeling. I didn’t guarantee that **overall** efficiency was increased. However, articles such as [this one](http://www.springerlink.com/content/jt78h0x12440367v/) suggest that it may be, owing to, for example, reduced health care costs when consumers have readily available information about product nutrition. > [@erislover](#): > > It is a lamentable position where a trade beneficial to both parties doesn’t happen because of information asymmetry. When this situation cripples entire markets, then it is a market failure. I think you’re using the term “market failure” in a more drastic sense than its standard economic meaning. “Market failure” usually just means that market allocation of goods or resources is for some reason not efficient in some way. It doesn’t imply the actual destruction of market functioning on a large scale. ---
**Author:** ![BrightNShiny](https://avatars.discourse-cdn.com/v4/letter/b/7bcc69/32.png) [@BrightNShiny](https://boards.straightdope.com/u/BrightNShiny)\ **Post date:** [March 13, 2009, 3:52am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/76 "2009-03-13T03:52:49Z")
> [@Ruminator](#): > > Yes, yes… it is so massively complicated that I can’t even follow your example! > > Where exactly did the $2.00 in “created wealth” come from? > > I don’t see a net increase of $2.00 in total system wealth. But this is how all wealth is defined. Nothing has an intrinsic value. We all assign things value and if enough people assign similar values to an object, then we can say that it has that value. Right now, we’re seeing that people have lost some of their wealth through declining home prices. It’s the same house. Where did the wealth go? Ultimately, it’s because everyone decided not to value the house at the same level they were valuing it a year ago. > [@](#): > > Does “wealth” get created from purely from transactions? Or are transactions just a measure of “economic activity” and is “economic activity” a true measure of total system wealth? A transaction is just basically any economic activity (buying, selling, giving a gift, etc.) The wealth comes from how we, collectively, value those transactions. Wealth is really a function of what you can give to someone else to get what you want. > [@](#): > > Or is “wealth” really defined by increasing productivity – in other words, human desires are fulfilled with less inputs (labor, energy, etc)? That’s an interesting question. Let’s say you increase your own personal productivity, and your income remains the same. Have you increased your wealth? You have more money in the bank, but really what you’ve done is change your wealth from one form to another. In this case, your wealth is stored currency, rather than used electricity. ---
**Author:** ![Kimstu](https://avatars.discourse-cdn.com/v4/letter/k/ecd19e/32.png) [@Kimstu](https://boards.straightdope.com/u/Kimstu)\ **Post date:** [March 13, 2009, 3:57am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/77 "2009-03-13T03:57:35Z")
> [@BrightNShiny](#): > > No, because the government requires the New Yorker to make a reasonable effort to ensure that the pages aren’t blank pages and to refund my money if they are. Another factor here is that **it’s dead easy** for the individual consumer to determine what the specific content is in a copy of the New Yorker. Pick it up off the newsstand, flip through the pages, and you know; the cost of this assessment by the individual consumer is practically nil. It is **not** easy or cheap, as you noted earlier, for the individual consumer to determine what the specific content is in a can of soup or other manufactured food product. So in that case, explicit government regulations mandating information disclosure about product content correct information asymmetry more easily than the consumer could. > [@BrightNShiny](#): > > If you have a very large number of highly inefficient transactions, then you will have an economy that tends towards wealth destruction. As we’ve been seeing, for example, in the very loosely regulated financial market for collateralized debt obligations, containing zillions of overvalued mortgages. Buyers did not have access to reliable information about what those mortgages were really worth, so they were not efficiently priced. Wealth destruction? Yup. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [March 13, 2009, 3:59am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/78 "2009-03-13T03:59:05Z")
> [@IdahoMauleMan](#): > > It’s only beneficial to the buyer if the benefits \>= price. Then value is created. > > But in this example, the buyer is apparently very worried about fraud and needs to mitigate the risk of it. His risk tolerance is low. That has a cost. Other people’s risk tolerance may be higher. That imposes less of a cost. Of course. And all this explains exactly why such market failures can occur. If people **had** reliable information about the **actual state** of affairs, trades would happen that aren’t. Market failures are discussed wrt Pareto efficiency. If we can make someone better off without making anyone worse off, then it is more efficient to do so. In the case in question, we could make the trade happen. > [@](#): > > So in this example, the buyer needs to mitigate the risk of fraud to ensure the benefits justify the price. The cost of that risk mitigation is $2. That’s too high. Therefore, the transaction doesn’t happen. Exactly the problem with information asymmetry. The trade should happen, but it doesn’t, because information asymmetry adds “risk” to the analysis. This is not the only problem with information asymmetry, just one kind of problem. > [@](#): > > After that, it was asserted in the post that somehow the government swoops in and mitigates risk for less than $2, which is the going rate in the private, competitive market. How the government can beat the private market for cost of appraisal is unclear. It is unclear. I agree. But I don’t believe it was part of our discussion. The example, afaik, was to show how a failure would happen because of asymmetric information, not how the government could solve this particular problem. > [@](#): > > It’s also unclear how there are no costs imposed on the seller as part of a verification process, much like the FDA imposes on drug and food companies. Of course there’s a cost. It’s the cause of the failure! The government cannot magically eliminate costs and no one has suggested they can. In some cases, they can force information out when the market would not otherwise provide it. > [@](#): > > Furthermore, the ‘efficient’ government model assumes a one-size-fits-all risk profile for potential buyers. It does not in cases where risk is not the question. I am not at risk from my consumption of HFCS in bread, yet it guides my decision process when I am purchasing bread. I am at risk for taking a loss when I buy a used car but nothing the government does will eliminate this risk. It is possible that different markets behave differently, and what the government can do in one is not a panacea for others, you see. > [@](#): > > But don’t feel bad. There are about 535 people like you who do the same thing every day in Washington, D.C. Please. Give me more credit than that. ---
**Author:** ![BrightNShiny](https://avatars.discourse-cdn.com/v4/letter/b/7bcc69/32.png) [@BrightNShiny](https://boards.straightdope.com/u/BrightNShiny)\ **Post date:** [March 13, 2009, 4:00am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/79 "2009-03-13T04:00:05Z")
> [@BrightNShiny](#): > > Now this is opposite basic capitalist theory. Fees, or any good or service, all have a lower limit on how cheap they can be, which is something called the [marginal cost](http://en.wikipedia.org/wiki/Marginal_cost). If the marginal cost of appraisal is too high, then you shouldn’t hire the appraisers. You have an implicit assumption here that fees can go indefinitely low enough to make appraising viable, and that’s simply not the case in the real world. I need to correct something here. What I should have said is that it is not _always_ the case that marginal costs go low enough to make something viable. It could happen or it might not. ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [March 13, 2009, 4:00am UTC](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236/80 "2009-03-13T04:00:53Z")
> [@BrightNShiny](#): > > No I didn’t. I used a fraud example to illustrate the concept of economic efficiency, because it’s an easy example to illustrate the concept. Unless you are talking about my calorie labeling example. This is actually not a fraud regulation, since having no label on the soup can isn’t fraudulent. > > \ Wow. You sound like the love child of Der Trihs and Voyager. And one who has been reading too many Economics 101 textbooks, to boot. You buy the New Yorker with confidence because the government is standing behind it with regulation? Really. Wow. What if I told you that’s crazy, and a government official has probably never inspected the printed pages of the New Yorker once for fraud? Not a single, solitary time. Nor with Conde Nast or Modern Yachting. Would that frighten you? Would you hesitate over the magazine rack the next time you thought about buying one of these, quivering with fright at the notion that government officials might not give a rats’ ass about whether there is a blank page or two in Architectural Digest or Popular Mechanics? And that you might be the first sucker caught in their nefarious scheme? What if I told you that those pages are always filled because those companies have worked diligently over the years to provide a high quality product that satisfies their customers, and that they have brands to protect. Would you believe me? Or would you dismiss my entreaties as so much foolishness…oh, IMM, you silly boy. That’s not why those pages are filled. It’s because the government is looking out for us. They are making sure those transactions take place in as efficient a manner as possible. People stood in line to buy iPhones because they were confident the government had tested them? You must be joking. The consumer review sites are still filled with people bitching about the battery quality of the iPods. The early versions sucked. But despite that, the benefits of the iPhone still outweighed the price and risk of poor quality. That’s why they bought them. [Previous page](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236.md?page=3) [Next page](https://boards.straightdope.com/t/does-this-explain-the-whole-conservative-liberal-ideological-divide/489236.md?page=5)