A quick question for AC Peeps: Market failure

[Borodog]

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boro, how do you respond to the lemon market issue?

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Criteria for a "lemon market" from the wiki article on such things:

- no buyers can accurately assess the value of a product through examination before sale is made
- all sellers can more accurately assess the value of a product prior to sale
- An incentive exists for the seller to pass off a low quality product as a higher quality one
- Sellers have no credible disclosure technology (sellers with a great car have no way to credibly disclose this to buyers)
- Deficiency of effective public quality assurances (by reputation or regulation)
- Deficiency of effective guarantees / warranties

Every one of these criteria does not hold in the real world. If one of these criteria were to actually hold in the real world, it would represent an arbitrage opportunity that an entrepreneur could step in profit from.

For example in the used car market:

- no buyers can accurately assess the value of a product through examination before sale is made

Every used car buyer can and should have the car inspected by an independent certified mechanic, and has the free choice to not purchase used cars from sellers who do not make cars available for such inspections.

- all sellers can more accurately assess the value of a product prior to sale

False for the above mentioned reason.

- An incentive exists for the seller to pass off a low quality product as a higher quality one

Quite often false. Why? People rarely drive used cars for more than 5 years. When they decide to sell/trade in the older car for another one, who are they more likely to bring return business to? The guy who sold them a lemon or the guy who treated them fairly? Who are they more likely to recommend? Who are they more likely to badmouth?

- Sellers have no credible disclosure technology (sellers with a great car have no way to credibly disclose this to buyers)

False. Certification programs exist which are backed up by reputation and can be checked by independent inspections.

- Deficiency of effective public quality assurances (by reputation or regulation)

False, for above reasonds.

- Deficiency of effective guarantees / warranties

False; market competition drives sellers to provide guarantees and warranties. Hence used cars often come with guarantees and warranties.

All of this is not to say that lemon sellers cannot exist and persist. They can. But they cannot dominate the market; they exist at the margins. The crooked automechanic will never become rich and dominate the market. The market is dominated by suppliers that provide the best goods and services and are hence rewarded with business, repeat business, the more referals and references, and the least amount of damage to their reputations. The disreputable suppliers, who "pass off low quality merchandise as higher quality goods" are skirting the edge of, if not committing outright, fraud. They can only exist at the margins.

In fact, the "lemon market" paper was originally published in 1970. 37 years later, in the world of Carmax and innumerable certified pre-owned program, I defy you to find a person that bought a "lemon" that went to any trouble at all. This is market competition filling any gaps that may have existed in the above criteria. I have bought many used cars, never had a lemon, and have never known anyone to have bought a lemon.

The idea that "assymetric information" is somehow a market failure is ridiculous. Guess what; the people who do their homework and research and study the competing alternatives and checking out the goods will get the best deal. Time is money. Those that don't spend the time on the research to find the best deals will not get the best deals. They will pay a premium for the time the don't spend researching alternatives and shopping around. Duh. It's the market working perfectly, thank you very much.

[tolbiny]

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They aren't "rejecting state sponsorship" here; they (well, one or two probably are out of the millions) aren't breaking the law because they are opposed to the type of state programs we are talking about here (although they may be opposed or incarcerated because of the drug war, which is an entirely different manner) or fighting them.

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When they reject the outcomes they are rejecting the system. Being organized or not or conscious of the underlying cause of the conditions you live in is not relevant. What is relevant is that they increase the costs on the system as a whole. Incarceration rates and costs place an increasing burden (oh and also remove potentially productive members of society, yay hidden costs) on the system which has finite resources. Social security (BTW i don't argue that receiving a check in the mail doesn't improve ones financial situation, be it SS or welfare, but that the system is not designed to alleviate poverty since it rewards poverty, it is those who would implement these policies with the purpose of alleviating poverty who are wrong about the outcomes) is expected to hit a point in which demands will outnumber contributions and then what? Senior citizens vote in the highest numbers, and they will be threatened with reduction of benefits when they hit a point in which they represent the highest percentage of the population ever. Who the hell is going to campaign (and win) on the reduce benefits ticket?


Economic mismanagement was a serious factor in bringing down several large empires. Lets just throw out the British, French, Russian, and the Romans. What is going to happen when the US can't pay its welfare checks, military, police, prison gaurds, social security and farm subsidies? When the money stops flowing (or loses its value) there will be a revolution.

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Businesses?

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Nope, violent revolutions are generally bad for business (there are probably a few that it could be good for as there are opportunities in everything) and they will do the natural intelligent thing, move away. Capital flight will exacerbate the situation caused by government overspending fueling whatever form the revolution takes.

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Remover too many or the wrong pro-union or safety net type policy in France and most of the country is on strike the next day. Doesn't sound like all of these workers are "voluntarily agreeing" to libertarian capitalism to me.

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Point was just that subsection of population X will be unhappy regardless of system Y that is in place. Of course the more homogeneous the population is the small subsection is, or the smaller the amount of unhappiness, but to maintain this status you must close your borders to the huddled masses.

[pvn]

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Thought experiment: A human destroys the Mona Lisa. Is this a market failure?

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this is seriously the last strawman that i will respond to.

obviously the Dodo's would sell for millions. in fact, you may want to breed the dodo's first so you can sell a bunch of them over time. I am sure every zoo in the world wants a pair.

this is all the evidence you need to know that the number of dodo's in the world should be nonzero.

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Every zoo would like a dinosaur, too. Market failure!

And every museum in the world would like the Mona Lisa, so the correct number should be non-one.

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Nice Strawman. Man didn't kill the dinosaurs, but unrestricted hunting and poaching and the destruction of the dodo's habitat by man (with no regulations against it in place) did.

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So I still don't see the failure. Would human-caused extinction of mosquitos, or roaches, or rats be a market failure?

And what about the Mona Lisa? Is the shortage of Mona Lisas a market failure?

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Yes to your first question, no to your second.

The market didn't create those animals, the market *did* kill the dodos. The Mona Lisa example is silly. Its not comparable.

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How can getting rid of those animals be a market failure? People spend craploads of money every year to kill those animals.

What's silly about the mona lisa example? There's obviously a demand for more of them than there are. Wouldn't YOU like to have the mona lisa on YOUR wall?

[jman220]

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Thought experiment: A human destroys the Mona Lisa. Is this a market failure?

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this is seriously the last strawman that i will respond to.

obviously the Dodo's would sell for millions. in fact, you may want to breed the dodo's first so you can sell a bunch of them over time. I am sure every zoo in the world wants a pair.

this is all the evidence you need to know that the number of dodo's in the world should be nonzero.

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Every zoo would like a dinosaur, too. Market failure!

And every museum in the world would like the Mona Lisa, so the correct number should be non-one.

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Nice Strawman. Man didn't kill the dinosaurs, but unrestricted hunting and poaching and the destruction of the dodo's habitat by man (with no regulations against it in place) did.

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So I still don't see the failure. Would human-caused extinction of mosquitos, or roaches, or rats be a market failure?

And what about the Mona Lisa? Is the shortage of Mona Lisas a market failure?

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Yes to your first question, no to your second.

The market didn't create those animals, the market *did* kill the dodos. The Mona Lisa example is silly. Its not comparable.

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How can getting rid of those animals be a market failure? People spend craploads of money every year to kill those animals.

What's silly about the mona lisa example? There's obviously a demand for more of them than there are. Wouldn't YOU like to have the mona lisa on YOUR wall?

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You didn't say "killing those animals." You said "extinction of those animals." There is a BIG difference. The ecosystem on this planet is a careful balance, and wholesale elimination of species alters that balance, oftentimes not in the favor of mankind. The destruction of animal species is a market failure that will eventually lead to a cascading market failure that, coupled with a whole bunch of other market failures, will lead to the deaths of a significant portion of the earth's human population. How that can be considered anything other than a "market failure" I do not know.

I reiterate that the Mona Lisa example is not comparable. It is not comparable at all for many reasons, not the least of which being thats a man made painting (thus created by the market, unlike animals), its a luxury good, its existence or lack thereof doesn't have dire implications for the rest of the world, etc. etc. etc.

[almostbusto]

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boro, how do you respond to the lemon market issue?

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Criteria for a "lemon market" from the wiki article on such things:

- no buyers can accurately assess the value of a product through examination before sale is made
- all sellers can more accurately assess the value of a product prior to sale
- An incentive exists for the seller to pass off a low quality product as a higher quality one
- Sellers have no credible disclosure technology (sellers with a great car have no way to credibly disclose this to buyers)
- Deficiency of effective public quality assurances (by reputation or regulation)
- Deficiency of effective guarantees / warranties

Every one of these criteria does not hold in the real world. If one of these criteria were to actually hold in the real world, it would represent an arbitrage opportunity that an entrepreneur could step in profit from.

For example in the used car market:

- no buyers can accurately assess the value of a product through examination before sale is made

Every used car buyer can and should have the car inspected by an independent certified mechanic, and has the free choice to not purchase used cars from sellers who do not make cars available for such inspections.

- all sellers can more accurately assess the value of a product prior to sale

False for the above mentioned reason.

- An incentive exists for the seller to pass off a low quality product as a higher quality one

Quite often false. Why? People rarely drive used cars for more than 5 years. When they decide to sell/trade in the older car for another one, who are they more likely to bring return business to? The guy who sold them a lemon or the guy who treated them fairly? Who are they more likely to recommend? Who are they more likely to badmouth?

- Sellers have no credible disclosure technology (sellers with a great car have no way to credibly disclose this to buyers)

False. Certification programs exist which are backed up by reputation and can be checked by independent inspections.

- Deficiency of effective public quality assurances (by reputation or regulation)

False, for above reasonds.

- Deficiency of effective guarantees / warranties

False; market competition drives sellers to provide guarantees and warranties. Hence used cars often come with guarantees and warranties.

All of this is not to say that lemon sellers cannot exist and persist. They can. But they cannot dominate the market; they exist at the margins. The crooked automechanic will never become rich and dominate the market. The market is dominated by suppliers that provide the best goods and services and are hence rewarded with business, repeat business, the more referals and references, and the least amount of damage to their reputations. The disreputable suppliers, who "pass off low quality merchandise as higher quality goods" are skirting the edge of, if not committing outright, fraud. They can only exist at the margins.

In fact, the "lemon market" paper was originally published in 1970. 37 years later, in the world of Carmax and innumerable certified pre-owned program, I defy you to find a person that bought a "lemon" that went to any trouble at all. This is market competition filling any gaps that may have existed in the above criteria. I have bought many used cars, never had a lemon, and have never known anyone to have bought a lemon.

The idea that "assymetric information" is somehow a market failure is ridiculous. Guess what; the people who do their homework and research and study the competing alternatives and checking out the goods will get the best deal. Time is money. Those that don't spend the time on the research to find the best deals will not get the best deals. They will pay a premium for the time the don't spend researching alternatives and shopping around. Duh. It's the market working perfectly, thank you very much.

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LOL for trying to refute nobel prize winning economists without actually reading their paper.

i know i know, appeal to authority. still... L! O! L!

you wouldn't want us to do the same thing for the great Hayek (who i love btw) would you?

[pvn]

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You didn't say "killing those animals." You said "extinction of those animals." There is a BIG difference. The ecosystem on this planet is a careful balance, and wholesale elimination of species alters that balance, oftentimes not in the favor of mankind.

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I would be more than happy to see all mosquitos die. ALL of them.

How would the extinction of roaches not be in my favor?

How has the extinction of the dodo negatively effected me?

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The destruction of animal species is a market failure that will eventually lead to a cascading market failure that, coupled with a whole bunch of other market failures, will lead to the deaths of a significant portion of the earth's human population. How that can be considered anything other than a "market failure" I do not know.

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Really? Human civilization as we know it depends on the mosquito? Perhaps things would be better without them. Like, millions of people wouldn't die from malaria.

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I reiterate that the Mona Lisa example is not comparable. It is not comparable at all for many reasons, not the least of which being thats a man made painting (thus created by the market, unlike animals), its a luxury good, its existence or lack thereof doesn't have dire implications for the rest of the world, etc. etc. etc.

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Market failures cannot occur in luxury items? I'll make a note of that.

[pvn]

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Sorry PVN, i told you I would give you a couple hours but after seeing you make several posts after i got my read receipt I assumed you had nothing to say in response to the PM.

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You said you would give me a day. Sorry, your excellency, next time I'll make sure I respond to your demands before I do anything else. Just please don't put me on ignore! Would you like me to pick up your dry cleaning??

[BCPVP]

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Sorry PVN, i told you I would give you a couple hours but after seeing you make several posts after i got my read receipt I assumed you had nothing to say in response to the PM.

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You said you would give me a day. Sorry, your excellency, next time I'll make sure I respond to your demands before I do anything else. Just please don't put me on ignore! Would you like me to pick up your dry cleaning??



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[tolbiny]

If your the guy win this thread who has claimed to have read and understood Austrian economics then this

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a good model for efficiency is when all possible beneficial transactions in a market have occurred. if that isn't happening then the market is failing to some extent.

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Is pretty funny. If its not, you should read Rothbard, he does a good job of dispelling the idea that perfect markets and perfect information should be either the model for or the goal of interactions. Much like examples of of plumbing in the 1800s in England this work is about an emerging (or changing) market. Markets don't spring into life a wonderfully efficient mechanisms, they grow and change with altering conditions. Car salesmen found they could overprice cars, consumers adjusted their evaluation of what prices should be, salesmen then altered again how they sold cars, eventually large reputable companies (like Honda) and others using technology (like carfax) stepped in to serve customers and to make a profit. This is called market growth, not market failure as you would have us believe. New technologies and new solutions to old problems.

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obviously the Dodo's would sell for millions. in fact, you may want to breed the dodo's first so you can sell a bunch of them over time. I am sure every zoo in the world wants a pair.

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If you were an economist you would realize that there is a cost to keeping a pair of dodos and their offspring alive (which you can't do since 2 is hardly ever the minimum for a sustainable population) for decades until they were suddenly worth millions of dollars.

The real thought experiment: how much would you have to pay all those settlers that arrived on Mauritius to preserve the existence of the dodo.

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However, when humans first arrived on Mauritius, they also brought with them other animals that had not existed on the island before, including dogs, pigs, cats, rats, and Crab-eating Macaques, which plundered the dodo nests, while humans destroyed the forests where the birds made their homes;[16] currently, the impact these animals — especially the pigs and macaques — had on the dodo population is considered to have been more severe than that of hunting. The 2005 expedition's finds are apparently of animals killed by a flash flood; such mass mortalities would have further jeopardized an already extinction-prone species.[17]

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Which basically would have meant that no settler could ever have arrived at all.

Econ 101: Transactions have a benefit AND a cost.

[tolbiny]

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So, imperfect knowledge is a market failure?

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Imperfect Information / Information asymmetry

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Directly from the wiki article. So yes, some people would believe that.

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No. All things contain uncertain information, using this definition is meaningless. Like calling all colors blue, sure technically you would be correct, all colors are blue if you define them all as blue, but it doesn't do help art teachers all that much.