Again, this falls into the naive-libertarian trap of assuming that markets never fail to address genuine problems. This simply isn’t true, as we see in the case of other external-cost issues, like pollution.
This is nonsense. For one thing, you’re again misinterpreting what I said. I’m not talking about tainted food, I’m talking about food purchases that are bad consumer choices because the consumers don’t know what’s in them.
Whether the result is sickness due to a food allergy, negative health impacts due to high levels of fat or calories, or simply wasted money because the consumer finds they can’t eat the product once they get it home, that transaction was inefficient, due to the consumer’s lack of information.
And of course the costs resulting from this information asymmetry are external to the pricing of the food product. Where on earth are you getting your claim that they’re not? What part of the manufacturer’s price-setting process do you claim captures these costs?
But the cost is external to the producer of the product, which is why it is not captured in the price of the product. That’s what makes a market failure: when the market fails to make the price of a good or service accurately reflect the actual costs of its production and use.
You seem to be using “externality” as you were previously using “regulation”: in an idiosyncratic sense that doesn’t correspond to the way it’s usually used, so it generates confusion. You seem to think that if an effect isn’t widely shared among the population at large, that means it’s not an externality.
But the point here is that the effect in question is external to one of the parties involved in the transaction, so its cost isn’t accurately reflected in the pricing. Consequently, the price of the good is artificially low: i.e., the pricing was inefficient. Yes, that is an externality.
I hate to be acting like an expert, pointing out the definition of a word I only just learned…
But I’m gonna have to go with IdahoMauleMan on this one. The example given is not an externality since it’s cost is payed by the consumer involved in the transaction.
I also still suspect that the information on food labels is not useful to the vast majority of people.
This is all correct. What you are missing is that the ability of people to assess risk is often not very good. Some of this is psychological, like the way people consider airlines riskier than autos when the opposite is true, and some is from lack of good information. The current crisis is an excellent example. Some of the problem is that banks buying mortgages assigned the risks to them incorrectly due to bad information from the rating agencies, which was partially due to bad models and partially due to the lack of information on the true creditworthiness of the borrowers. In other cases people ignored risk because it reduced short term profitability.
The borrower is another example. I suspect most borrowers of subprime loans miscalculated their risks, partially due to bad advice, partially due to their inability to understand the intricacies of the thing they were signing, and partially due to wishing they could afford the house.
Information asymmetry does not only mean information or the lack thereof. A contract can be written plainly, or it can be coded so that only lawyers and logicians can understand it. The information in the contract is equivalent, and often it is expressed more succinctly in the coded version, but there are vastly different levels of comprehension between the borrower and the broker.
As for the impact of the failure of risk assessment, the improper assessment of risk on Wall Street didn’t affect only the people doing the assessing, it also affected their shareholders and plenty of us who didn’t own their stock at all.
You seem like you understand business. Maybe you can help me work through a case study, so that you can help me understand how a private company can provide this information.
Here’s the scenario: I’m running a successful company that tests for cancer-producing agents. Testing for this particular form of carcinogenic is expensive—after paying for the lab techs, the expensive and sophisticated testing equipment, rent for my laboratory, etc. costs me $100,000,000 a year. That’s OK though, because I have 10,001 customers who each pay $10,000 a year for me to let them know if any of their foods cause cancer.
The FDA got shut down by libertarians, so there are no competitors for the information I provide.
For the first year of business I haven’t found anything, and my customers are getting antsy, paying $10,000 a year each for negative information. But I’m a great salesman and I can hold on to my customer base.
In my second year of business I find something. I find something big. A popular food, eaten by hundreds of millions of people, causes a 100% fatal cancer. If they don’t stop eating it now, millions and millions of people will die.
Obviously I tell my customers. They’re very antisocial though, and they won’t tell anyone else about the risk. They hate crowding, so they’re all perfectly OK with letting everyone else die.
Here’s my question, and it’s a simple one: do I publically announce my findings, or do I let all my non-subscribers die?
Perhaps to make it even clearer, consider yourself as a possible subscriber to EvilEconomist’s cancer-screening company. You are privately assessing the costs and benefits of paying ten large per year to receive the benefits of membership.
You spin the same scenario to yourself. “Suppose EE Corp discovers a whopper of a carcinogen. Will they keep it to themselves or will they share it with the world? There is no way information like that can stay secret. So do I pony up or do I let some other stiff do it?”
Imagine the outcome when everyone uses this logic. The mutual set of best responses here does not necessarily optimize social welfare.
A good example maybe, but not an example of what you think.
The reason the example buisness is impossible is because no matter how many people choose to keep information to themselves, it only takes one person to overcome them all if he believes sharing the info is a worthwhile persuit. The nature of information makes any system inherently rigged to favor the spread of information, and technology is only making this more and more signifigant.
This hardly supports the claim that government regulation is necessary to combat information asymmetry. The cancer screening buisness, would (if cancer screening in the sense you mention is valuable) work just fine if the producers of products paid to have their products independantly screened. Then consumers who valued this safety precaution would choose the products which have been screened.
You are not thinking this through. A producer may claim that his products are screened, but the consumer would not reasonably be able to verify this. Even if the producer does have his products screened, the consumer would have no reasonable way to verify the efficacy of this screening.
The only way a consumer could verify that a product is screened probably is to pay for it to be done himself. For obvious reasons, this business model would not work.
Our only other alternative is building institutions to ensure both that the screening occurs and that the screening is done properly.
I think there are too many different kinds of conservatives and too many different kinds of liberals to make any generalization.
Certainly, there is a certain segment of the conservative movement that has the attitude of “How your life turns out is mainly up to you, so it’s not societies job to help you out if your life is bad,” and there’s a certain segment of the liberal movement that says “How your life turns out is strongly influenced by social factors, and so we as a society have an obligation to help you out if your life is bad.” But it’s not as if liberals don’t believe in personal responsibility or conservatives don’t believe in social influences – it’s more a matter of how heavily you factor these things in when it comes to welfare policy and such. But like I said, there are different sorts of conservativism and liberalism to which this point wouldn’t really apply.
Another common area of disagreement is on how appropriate it is to use the government as a tool for addressing social ills. I mean, lots of conservatives would agree that we do have a moral obligation to help the poor, but they might feel it should be mostly through private charitable efforts as opposed to government relief programs.
How would paying for something yourself give any more verification that you are getting what you pay for?
The ability to verify the screening is a necessary part of a successful screening buisness, regardless of wether it’s the government, producer, or consumer who pays for it.
edit: actually the government is excepted. The FDA doesn’t have to verify they’ve screened anything to keep getting payed by the government. That’s kinda the point.
I guess I would have to ask; if what you say is correct, why hasn’t it happened? You seem to be coming up with theories of what would happen that directly contradict what we have seen in the real world.
Do you suppose that’s because your theories don’t accurately model human behavior?
The FDA was formed because companies weren’t providing that sort of information. According to wikipedia,
Why do you think the free market failed to remove radioactive products and cosmetics that produce blindness from the market? A theory that utterly fails to predict real-world behavior is fairly useless, don’t you think? Why continue to apply it?
I don’t think I’m the one coming up with these theories. I am meerly repeating things which have been stated in this very thread (as justification for government regulation) and pointing out how it seems (from my uneducated view at least) to be missing something important.
I reffer to my original question:
The only answer offered is the concept of externalities but, as has been pointed out (and I assume, accepted) that simply doesn’t apply to the examples in question.
P1. Pollution is an externality. In other threads I use the term ‘public externality’, which is a slight redundancy and a bit of a bastardized term to address these things. That is, a transaction between two parties A and B can impose costs on lots of persons D-Z, even though persons D-Z were not party to the transaction. That’s my definition of ‘public externality’. Obviously, it’s not yours.
P2. If consumers don’t know what is in the food, that is information asymmetry. Information asymmetry creates risk. The consumer actually has a lot of choices about how to address this risk.
They can ignore it, and go ahead and buy the food. If their risk tolerance is high.
They can employ an agent, or use other information to calculate the risk and act accordingly. Has this product been on the shelf many times over the past year, and therefore lots of people must be buying it? Have my neighbors bought it, and dropped dead? Are there reviews on the Internet with regards to its quality? Is it tested and branded by some agency? Does a celebrity that I trust endorse the product? Do I trust this store that shelves the product to make good decisions? Do I want to take it home and test it in my basement lab, first?
All of these things provide information to the buyer. The provision of information comes with various costs attached to it. Some of those costs may be absorbed at the point of production or sale by the seller. Some (e.g. the passage of time without the product, to assess it’s effectiveness on others) may be born by the consumer.
The consumer can take all of this information, weigh it against the costs and the risk, and decide what to do. I guarantee you are doing this every day, whether you realize it or not.
The consumer can decide not to buy it at all, if he is still uncomfortable with the risk. He may search for substitutes that satisfy his objective: rice or other grains in the form of bread, or hot dog buns.
You, and others on this Board, seem to think that information asymmetry ‘goes away’ if the government steps in and assumes the role of a monopoly appraisal organization, like the FDA. It doesn’t. All that has happened is that government has imposed a certain product feature (the quality of their appraisal) on the market at a certain cost (the elements of which I described above).
Risk hasn’t gone away. There has just been one, single risk mitigation feature inserted that may or may not address the issue of concern for the customer. And it’s mandated by law. And it’s price is non-negotiable.
P3. I disagree. The risk associated with the purchase was realized if these events happened. The cost of risk was assessed in the purchase decision. I would argue that the transaction was perfectly efficient.
P4. The manufacturer’s price setting is only one part of the transaction chain. Not all the costs will be captured in their ‘recommended price’.
For example, what would happen if the FDA was made voluntary tomorrow? And a few drug companies said, ‘Whew. We didn’t have the $1 billion and 7 years it would take to clear those hurdles, anyway. So we’ll just sell the product right now, untested, for much cheaper.’ And they set a price.
What would happen? Some people might buy. Some people might not. They might want some testing to occur.
There are many, many independent labs all over the US who do outsourced testing for food and drug companies. Mostly, they do it to satisfy FDA requirements. But they would be natural fits to ‘fill the void’ if testing became market-driven. They could buy the products from the drug companies, and then test them (maybe at different levels, taking different lengths of time, and at different price points) and resell them.
That’s a natural market reaction to consumer demand for tested products. So what the manufacturer decides to price his product can become irrelevant, in a free and competitive market.
P5. I agree. That applies to situations where there are public externalities. This is not one of those situations.
P6. It’s an effect that is widely shared among the population at large, and for which they bear the costs, OVER WHICH THEY HAVE NO CONTROL. In other words, if they were not the ones assessing the risks, and the costs of mitigating risks, and making a decision accordingly.
I will repeat to you the question I asked IdahoMauleMan (who hasn’t answered it, AFAICT):
In what way are the costs of ill-informed food product choices captured in the PRICING of the food products?
They aren’t. That’s classic example of market failure. The market is failing to make the price of the good accurately reflect the costs of its use. Customers are not paying the optimal price for the good because they have a mistaken notion of what its real value to them is.
You’re still talking past my point, because you’re talking about government product safety testing and I’m talking about product information labeling. Yes, product information labeling does reduce information asymmetry, because the consumer has easier access to information.
No, it was not, because the consumer did not have reliable information about the risk level. If you don’t know what’s in a product, that impairs your ability to accurately assess the risks involved in its use. That means that the transaction is not efficient.
See above. I don’t know what an ‘optimal price’ is, but I do know that consumers will pay if price <= benefits.
Benefits include product features, but also risk. The cost (or price) of that risk is unique to each consumer. It is not figured by the seller.
Once they make a decision to move forward with the purchase, or not move forward, they have weighed the cost of risk against the risk itself and acted accordingly.
You, like some others on this Board, seem to think consumers are helpless victims, flailing in the wind, and are powerless to shape their fates and exercise control over the basic equation shown above.
They’re not powerless. You’re not powerless. You have all the power. That’s why it’s called a ‘voluntary transaction’. It can’t happen without your consent.
No. It just means there is a different level of risk, and perhaps larger error bars around the assessed level of risk.
Yes. It does impair your ability to accurately assess the risk. Your ability to assess risk will slide up or down the scale depending on the information at hand, and your own preferences.
No. Because you will assign different costs (or prices) to the level of risk, depending on where it is on the scale. It stays perfectly efficient.
For example, I might assume that a branded, tested loaf of bread from a company that has been around for 100 years has a 99.9999% chance of being good. With maybe a tolerance of .00001% around that estimate. It costs $5.
I might assume that a new brand, of which I’ve never seen before and is not tested, has a 90% chance of being good. With a tolerance of 9% around that figure. It costs $3.
Which loaf I choose to buy will factor in my assessment of risk and the cost of risk. Suppose I buy both loaves.
I could get both loaves home, and the 100-year branded loaf could go bad, and the new brand could be just fine. That doesn’t mean my assessment was wrong. It means the small chance that the 100-year old brand could go bad, was realized. I priced that risk accordingly when I bought it. And the risk was realized. Which is a bummer. But the transaction was still perfectly efficient.
As a case in point, remember the financial institutions paid the rating agencies to rate their bonds. That didn’t work out all that well, did it? What would happen in your case is that there would be a strong incentive for a private rater to mark marginal products safe. You’d be fine if you had some machine which could flash a red light or green light depending on whether something causes cancer or not, but in reality there is a probability of a certain number of cases caused by a product, which will seldom be zero. A company could shop around for the rater who gives the most positive responses, and those companies who are the most honest will be at a competitive disadvantage, and there would be a race for the bottom. You might make this happen, like with UL, if there was quasi-regulation, that is, if government chose which rating agencies to recognize. But regulating a lot of agencies would expensive, and, since cancer takes a while to show up, you might have a carcinogen released into the food supply before you know it. Which happens anyway, of course, but no regulation is perfect.
