Yeah, it was sloppy of me. I tried to correct the gaffe, as you may see, but… mea cupla.
Exactly. Information asymmetry is always present. It creates risk.
Mitigating risks has COSTS. Bringing information to potential buyers and sellers to mitigate risk has COSTS.
Different people have different risk tolerances. Therefore, they are willing to pay more, or less, to mitigate risk depending on their tolerance.
It’s no different than any other product feature. It’s like the government mandating that all bicycles have three coats of paint on them, even though some buyers may be happy with only one coat, and some buyers may want five coats.
Regulation in a case like the painting example mandates a certain product feature (a certain quality of appraisal) at a certain price (whatever it costs the government). Buyers may or may not want that feature, and may or may not want to pay for it. But once it is mandated they have no choice.
Why would you impose something like that on the market? It makes no sense. It does not create efficiency. It destroys efficiency, by creating losses via
-
Direct costs of regulation borne by the public
-
Transactions that did not occur because of the higher costs imposed by the government on consumers who were not willing to pay them
-
Fewer products and innovations brought to market because of the higher hurdle rates required, due to mandated product features and costs
I think the both of you are a little off on this one. As I noted above, magazines aren’t trying to peddle you copies full of blank paper because if they did, it would be extremely easy for you to detect it.
In the days before industrial food manufacture, it was also fairly easy to determine what your friendly neighborhood food producer was putting in his/her products. That is not the case with most commercially available food products nowadays. Like the specific condition of used cars, the specific contents of commercial food products are fairly easy to conceal from the average consumer.
(So why does the market successfully provide reliable information disclosure mechanisms about the condition of used cars but not about the content of food products? Well, for one thing, used car purchases tend to be much more rare and costly than food purchases. People who are about to drop thousands of bucks on a used car are willing to invest some time and money in acquiring trustworthy information about it. People buying frozen chicken nuggets at the grocery store, on the other hand, are not (even though in the long run, the contents of the chicken nuggets might end up having a more significant impact on their health than the condition of the used car). Correcting information asymmetry on frequent cheap transactions needs to be easier and cheaper than it does for rare and costly transactions, or the consumer won’t bother with it.)
Sorry, but a lot of what you’re saying is wrong. For instance, you can have Pareto optimal outcomes with information asymmetry. If you want to argue for regulation you need to look at externalities.
You mean utility, not wealth. Wealth is unchanged.
Wealth is unchanged. Before negotiation person A had worthless painting and zero dollars. Person B had $4. Total system wealth = $4.
After negotiation person A had $4 and person B had worthless painting. Total wealth = $4.
Look at utility instead. Unfortunately, if person A receives higher utility from $4 than person B, then overall utility is higher, even though the transaction was fraudulent. Also, I should point out that both economies (before and after transaction) are pareto efficient.
Ah, ok. I see your not interested in a serious economic debate.
This isn’t an argument. This is ridiculous posturing. We have a multiple level regulatory regime in the United States. There is voluntary private regulation, government-backed private regulation, prior regulation which occurs without inspection, regulation which occurs with inspection and finally the court system.
If the US, for a number of products (such as newspapers), we don’t require prior government inspection. That doesn’t mean that regulations don’t exist or that they aren’t enforced. If the FTC started receiving complaints about blank New Yorkers, they would send someone out to inspect and either fine the New Yorker or require changes in business practices to reduce the number of blank New Yorkers going out.
Yes, there is a market incentives that push towards the same result. But what you are doing here is making an assumption that everyone in the publishing business has the exact same market incentives. Do you know who else assumes everyone has the same incentives? Central planners.
Why don’t you try reading what I said and responding to it, instead of responding to something you made up. I said that the government requires Apple to test its products and to guarantee them. Not that the government tests them.
No, I’m not joking, and you’re complete refusal to even learn a little bit about capitalism is bizarre. On top of that, you are debating dishonestly in this thread by attributing comments to me that I never made and arguing against extreme positions that I haven’t taken, and calling me Der Trihs, which is bizzare, considering he has a completely different economic philosophy than I do (from what I can gather).
But the key is your statement of the “benefits outweighing the price and risk of poor quality.” As I’ve already pointed out to you, as transaction costs go up, that calculation changes. The higher the transaction costs, the hire the price of purchase, which means that (if people are behaving economically rationally), less people will purchase the product. Having an organization such as the CPSC regulation the iPhone for safety reduces the transaction cost of the iPhone, which reduces the overall cost of the iPhone, which pushes the calculation further in favor of purchasing an iPhone and away from not purchasing an iPhone.
Yes, that’s true, and I’m trying to keep the debate simple, so I should have been clearer. All my Pareto inefficient information assymetry examples, I believe, involve externalities, though.
Yes, thanks for the clarification. I was typing in a hurry. I have to leave for the night, but this thread has been interesting.
It does. And because of that, trades that should happen, won’t.
Correct.
Yep.
You seem to be conflating several levels of analysis in order to make pithy summaries to boost your position. So let’s back up a moment and see if we can untangle this ball of yarn.
First, there’s information asymmetry. It can cause market failures by imposing costs (risk or transaction costs have been mentioned) which prevent Pareto-improving trades from occurring. There is no general solution to this problem. No one has proposed there is. It sucks. Markets are imperfect, and not perfectly efficient.
Second, there’s the question of the necessity of government intervention. The market may be unable to muster up the will to correct information imbalances on its own, without a little nudge from Uncle Sam. On the other hand, the market may dig deep down and fix the problem itself. It happens.
Third, there is the question of whether the government doing this is a net loss. In some cases, it may be, in others, it may not be. But the closer we get to perfect information, the closer we get to an efficient market. Again, this does not mean government coercion will necessarily lead to more efficiency overall. But it also doesn’t mean that it is impossible or even unlikely that it won’t.
Actually, I think you might need a third party to be involved in the transaction to have an externality. Still, don’t mean to criticize–it’s a good explanation, and I understand you’re being descriptive rather than rigorous, so I’ll bow out.
Can anyone explain why the market would fail to correct information imbalances on its own, but the government would succeed?
Just what is at the heart of such failures and why would the government be able to overcome them?
I keep seeing the example of labels on bread. Yeah, the market never created them on it’s own but it seems to me that was because people just didn’t see that information as being more valuable than the cost of providing it. Now the government steps in and decides it knows better what is valuable and what isn’t and mandates that this information be added, and we are all forced to pay the costs. Well seriously, do any of you actually read those labels??
If that information was worth the cost, why did it need to be imposed by the government?
Suppose the cost to force companies to provide the information is high–higher than the benefit to any one person. In that case there’s no incentive for any one person to pay (or mandate) companies to attach the labels.
However, there are hundreds of millions of people in the United States, and if you add up the benefit to all of them then the beneift greatly exceeds the costs. So if everyone chipped in it would be worthwhile to pay the companies to provide the label; the cost to each person would be, say, $0.01, but the benefit would be much greater than that.
Chipping-in would be nice, and if everyone did it that would work just as well as asking the government to do it. But too many people would choose not to chip in. They would free-ride–they wouldn’t contribute, but since the labels would be there for everyone, they would get the same benefit as the people who did pay.
The fact that people free-ride would discourage the kind of community action that would have benefited everyone.
The government can make everyone pay–essentially it can enforce “fairness,” and enforce coordinated action.
This concept–that the cost to any one person exceeds the beneift to that person, but the cost to a group of people exceeds the benefit to that group of people–is referred to as an externality.
But one person wouldn’t have to bear the entire cost. If it were valuable, a company could just include the information, and the cost of all bread from that company would be slightly higher. If the information were valuable, people would ‘chip in’ by choosing products which have that information provided over products which don’t include it.
I’m utterly mystified how such a thing could be.
What if the information is damaging to the company? What if they don’t want to have to charge a higher price just to reveal that their primary ingredient is high fructose corn syrup?
Not a difficult concept. You could start by reading Wikipedia. It’s also covered in every undergraduate introductory economics textbook, which you can borrow for free from any library.
heh… I was already on wikipedia… I was just really thrown because I didn’t realize that the ‘group’ you reffered to included people who weren’t buying the bread. Now I see it’s a fairly straightforward concept. I just don’t see how it applies here.
How can providing information which nobody considers important enough to pay for, be of any benifit to people who aren’t even buying that product?
Well, what’s at the heart of many such market failures are so-called “externalities”. Those are advantages or disadvantages that aren’t reflected in the cost of a good because their impacts aren’t fully captured by the buyer or seller.
For example, when consumers don’t have information about the content of commercial food products, there are costs associated with that. People with nut allergies unknowingly eat foods containing nut products and have to go to the emergency room, which is expensive. People buy food products without realizing, until they open them, that the products contain ingredients they don’t like or are forbidden to eat, so the money they spent on the food was wasted. And so on and so forth.
But these costs aren’t reflected in the prices of the products, because they don’t directly impact the food manufacturers. As far as a manufacturer is concerned, if you buy their pound cake and then can’t eat it because it has nuts in it, that doesn’t cost them anything. Unless they’re actually illegally adulterating or contaminating their products, anything that happens to you because you didn’t know what was in the food they sold you is not their fault, so they bear none of its costs.
The cost is real, and it resulted directly from the transaction where they sold you the food, but it’s external to the food producer. So the price of the food is artificially low because it doesn’t have to account for that cost.
Mandatory product labeling transforms these external costs resulting from lack of information into internal costs, or costs which are included in the product price. All manufacturers now have to pay to put informational labels on their food products, and part or all of that cost is passed on to the consumer in the increased price of the good.
(This is somewhat different from directly internalizing external costs, which is what happens when, say, power plants have to pay fines for emitting pollutants. In the food labeling case, the manufacturers aren’t directly absorbing the costs of their customers’ hospital bills and wasted food and so on. Instead, the costs caused by lack of information (which are external, and not captured by the price of the good) are being reduced, and the cost of providing information via labeling (which is internal, and is captured in the pricing) is being imposed.)
Sure, all the time, for everything from calorie content to other nutrition facts to checking for ingredients that I can’t serve to guests with certain dietary restrictions, and so on and so forth. You shouldn’t be too quick to assume that something must be totally useless just because the government sponsored it.
Because of the “externality” issues that I was talking about. What something is “worth” depends not only on how beneficial it is, but on who gets the benefits of it and how they get them. Like it or not, markets are not always successful in forcing the costs and benefits of goods and services to be accurately reflected in their pricing, and any economist will tell you the same.
To take another example, why do traffic regulations have to be imposed by the government? Why don’t we just all voluntarily agree upon a set of conventions for using the roads, and voluntarily follow them?
Because the benefits of everybody following the rules are spread out among all users, while the benefits of occasionally breaking the rules can be very high for individual users (Hey, if I drive to my exit in the breakdown lane I’ll bypass this traffic jam!) , especially if the costs can be transferred to other users (Oopsie, I just knocked over that motorcyclist; gee, a good thing there aren’t any traffic police to hassle me about it!).
Not all value is reliably accounted for by market structures. Astonishing (to libertarians, at least), but true.
Do you really think no one finds a benefit in food labels? Do you really think that the overall benefit to society from having food labels is exceeded by the cost of enforcing them?
Do you think the only people who benefit from nutrition labels on bread are people who buy bread? What about people who alter their buying decisions based on food labels?
Here’s the real question for you–If food labels don’t benefit society, why does society demand that their government require companies to provide them?
Because, for example, some of the people who aren’t buying the product are helping to pay for the healthcare of people who are buying it. If you need an ER doctor and a stomach pump to cope with the consequences of eating that pound cake, that’s costing not only you but everyone in your insurance pool.
As a general rule, it is more economically efficient when fewer people are buying food that makes them sick, or that they have to throw out because it doesn’t fit their dietary restrictions, or that negatively impacts their health in the long run. Informed transactions tend to be efficient transactions, broadly speaking.
Oh I’m hardly a believer in the magic hand of the market making everything right. And I don’t mean to imply that the information on food packaging is useless to everyone, But frankly, I am still unconvinced that it is worth the cost. Again, it seems to be glossed over that the costs you’re saying the food labeling avoids, are still costs which would be payed primarily by the people who buy those items. So if avoiding buying something which they weren’t going to eat isn’t worth it to them to pay the cost of including the information, I don’t see how it can be worth so much more to everyone else such that it becomes useful to impose a regulation.
I’m not denying the concept of externalities (I’ve always known about it, I just didn’t know what it was called until today 
) I just don’t see how it applies to the concept of information imbalance.
I have my doubts that society demands that goverment do most of the things it does. A few people may like the idea of everyone paying for something they think might be useful to themselves (but not useful enough to pay for it themselves) and the government is all too happy to use this as a pretense for their own corrupt manipulations of other people’s buisness.
Since have not answered the question, I will paraphrase what I think you are saying, which is that many conservatives are hypocritical and intolerant of those who disagree with them. Which may very well be true, but I have a feeling that once you specify some of Bush’s misconduct in this regard, I will be able to point to prominent liberals who have exhibited analagous misconduct.
Well, this is why they do economic cost-benefit analyses of public policy measures, as in the cite I linked to back in my post #75. The basic procedure, AFAICT, works like this:
A) Add up the costs of putting mandatory product information labels on food products.
B) Add up the money saved by consumers having better information about food products (reduced healthcare costs, for example).
If the amount in B is bigger than the amount in A, then overall it was worth it financially to impose the regulation.
(But of course, that’s not taking into account all the hard-to-price intangible effects that may affect the perceived worth of the regulation, such as increasing public awareness of diet and nutrition, fostering a nanny-state dependency mindset, etc. etc.)
How do you know society is demanding that the government provide them?
Let’s make it voluntary, and if 100% of society demands sound food appraisals, there should be lots of companies scrambling to fill that void and provide competitive, innovative ways to label food. There would be no need for the government to get involved at all, if all of society ‘demanded’ it.
Same with the FDA. Same with the CPSF. Hell, let’s make complicity with those agencies’ mandates voluntary right now. Go ahead and buy products that are only labeled ‘FDA approved’ if you want. But other people may not care. Let’s allow drug companies avoid the FDA testing, or perhaps engage in different, more efficient types of testing, and see if anybody buys their products. Shall we give it a go? If your theory is correct, everyone will immediately stampede over to the ‘FDA approved’ aisle.
And as for Kimstu’s point regarding externalities, that is a fallacy. An individual making a decision to buy tainted food, and get sick, is most certaintly not an externality. This untrue point is repeated endelessly…but it’s often the justification for launching federal oversight.
The person buys food, gets sick, and it is confined to him. That the photographic negative image of an externality. That’s an ‘internality’, if such a word exists. You could not drum up a tighter definition of something that is not an externality. It’s only an externality if he eats the food, explodes, and bits of his flying body hurtle threw the air and kill or maim 100 innocent bystanders.
The claim that his ‘health costs’ also trigger an externality and therefore demand federal oversight are also specious. I ran through some numbers in the FDA thread that demonstrate how enormous numbers of people - far beyond anything rational - would have to drop dead for the health costs of their tab to even approach the costs of the FDA. That is simply implausible, primarily due to the ‘High Severity Bad Events’ effect I describe above.