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From: laura@l5.uucp (Laura Creighton)
Newsgroups: net.politics.theory
Subject: Re: The free market
Message-ID: <180@l5.uucp>
Date: Sun, 6-Oct-85 18:27:56 EDT
Article-I.D.: l5.180
Posted: Sun Oct  6 18:27:56 1985
Date-Received: Tue, 8-Oct-85 07:44:39 EDT
References: <204@gargoyle.UUCP> <10516@ucbvax.ARPA> <206@gargoyle.UUCP>
Reply-To: laura@l5.UUCP (Laura Creighton)
Organization: Ell-Five [Consultants], San Francisco
Lines: 47

In article <206@gargoyle.UUCP> carnes@gargoyle.UUCP (Richard Carnes) writes:
>
>There are many situations that can be described in which the market
>does not "optimally" allocate resources (let's assume for the moment
>we all agree on what "optimal" means).  Here is a very simple one:
>
>Let us say there is a town with owners of used cars and potential
>buyers of the cars.  The cars vary in quality from great to lemons,
>but only the owners know the quality of the cars.  A potential buyer
>must assume that a used car he is looking at is of average quality,
>and therefore he would only be willing to pay (say) $1000, the price
>of an average used car.  But the only owners willing to sell at that
>price are those with cars of below average quality.  The potential
>buyers realize this, and so are not willing to buy any car that an
>owner is willing to sell.  Hence there are no transactions, even
>though such trades would be beneficial to both parties.  It is the
>asymmetry of information that causes the market inefficiency.  It is
>clear that such information asymmetries are common in markets.
>
Actually, what you have to read is something by Israel M Kirzner, who seems
to be the current libertarian scholar of the asymmetry of information.

What you also have to do is to consider how the market operates. Right now
in your situation, there is great opportunity for entrepreneurship. (Kirzner
defines the ``pure entrepreneur'' as the dealer in information; but I forget
in what book and mine are all still in Toronto...grrr...so I can't look it
up.)

What you have is a lot of car which are worth less-or-equal to $1000 to their
owners and worth equal-to-or-more-than $1000 to the buyers.  Thus these
trades would be beneficial to both parties.  The problem is that nobody wants
a lemon.  However, Joe Entrepeneur-Car Mechanic comes up with a solution.
For $50 he will certify all cars that are worth $1000 or more.  If everybody
adopts this, then there will be an added cost to Fred Car-Buyer/Mechanic
who didn't need the efforts of Joe, but as long as the car still is worth
the cost of it to him he doesn't lose (he just doesn't win by as much as he
could have).

The market recovers from such problems very quickly.  For this reason the
market is useful as a measuerment of information.  This is one of the
claims against tarrifs and the like: it destroys the market's ability to
convey the information of how valuable something is (in terms of other
things) by artificially increasing the value of something.
-- 
Laura Creighton		(note new address!)
sun!l5!laura		(that is ell-five, not fifteen)
l5!laura@lll-crg.arpa