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Can someone with a micro-econ background explain what is going wrong with the free market model and how to fix it? It used to be that goods and services would

by imglorp 11y ago

Can someone with a micro-econ background explain what is going wrong with the free market model and how to fix it? It used to be that goods and services would compete on price and quality. If someone could offer the same quality for less, buyers would go there. It was self regulating to some point: predation was limited by the system. Now, however, there are dozens of markets where this is no longer true. There are geographically region-locked prices: pharmaceuticals, textbooks, dvd's, etc. There are opaque and arbitrary prices like healthcare, software (hello oracle), and per the article, airlines and tuition. Some of this is due to artificial protections like patents and copyrights. But not all of it. What's up?

pjc50 11y ago
(1) Akerloff's paper "Market for Lemons": ability to assess quality depends on information. Adequate information may not be available to all parties equally and may be costly to acquire. It may not be realistic for private individuals to assess the quality of their healthcare or tuition, even after the event. See also VW: it's easy to lie about details which affect the quality. (2) Increasing perfection of price discrimination: market participants charging different prices to different customers. Airlines can do this because of the ID requirements and non-resaleable tickets. Private healthcare can do this too. (3) Switching costs: Oracle win at lockin. Big problem in the software world, but also for tuition (incomplete courses not portable). (4) Regulatory capture & paid lobbying: applies to pharmaceuticals, textbooks, DVDs, healthcare.
- roymurdock 11y ago
  In summary: frictions (informational, capital, & regulatory) that distort the efficiency of free markets, which technology can help solve. In the context of the college discussion, it's largely informational and regulatory. How can you judge the value of a huge intangible such as a college education? How is the government structuring loans and the public school system to provide alternatives to the price of education on the free market?
- rm999 11y ago
  The information issue with healthcare and education is even more perverse than in "Market for Lemons" - it's not that the quality of the product is unknown (although it often arguably is), it's that the price is unknown. As the article says, incoming freshman have no idea how much their 2nd through 4th years will cost, just an upper ceiling. They are usually misled to believe their final tuition will be lower than it actually is, skewing their value judgement. Likewise with healthcare, I often get surprise bills from my insurance company for just doing what my doctor instructs me to do. There's a lot of incentive for doctors to do unnecessary procedures without explaining the costs.
danharaj 11y ago
Consider the transaction costs of figuring out which university is actually the best for you. They are high. Transaction costs are high in almost every market. Go to the supermarket. There are 10 brands of raspberry jam. Huzzah! The free market's competition at work! How much time are you willing to spend figuring out which of the 10 brands is the best for you? The free market model assumes a variety of unrealistic conditions between buyers and sellers. The idea is that reality is close enough that the models still work. When the models don't work, instead of questioning the wisdom of the soothsayers and keepers of the economy, the economy itself is blamed. > It used to be that goods and services would compete on price and quality. If someone could offer the same quality for less, buyers would go there. It was self regulating to some point: predation was limited by the system I don't think this was ever true. So many cultures across all time periods have complained about charlatans and cheats, robber barons and the greedy rich. A lot of people think regulations exist because people are sour and can't handle being losers in the free market, or something. If you trust peoples' sense of fairness then the more likely scenario is that people have been getting cheated for a long time. Why are regulations so ineffective? Intelligence is like water. If it flows towards some goal, it will flow around all obstacles to get there. Regulations are like trying to dam a river by putting a giant concrete block in the middle of it. It could work, but only if you're far, far smarter than the collective human intelligence you're trying to control. No one is, though. So every generation sees a new set of regulations, a new form of economic institutions, and a new nervous illusion of stability that will eventually give way to crisis and a new ideology of regulations and economic institutions. It should come as no surprise that an adversarial system whose purpose is to allocate economic and political power leads to such abusive behavior.
- a3voices 11y ago
  > figuring out which university is actually the best for you It's even further complicated by the definition of "best". What is any given student optimizing for: Lifetime earnings? Some vague notion of happiness? Culturally fitting in? Chances of getting an elite job position eventually? Not all of these are tied to economics and prices.
  - lfowles 11y ago

by imglorp 11y ago

pjc50 11y ago

(1) Akerloff's paper "Market for Lemons": ability to assess quality depends on information. Adequate information may not be available to all parties equally and may be costly to acquire. It may not be realistic for private individuals to assess the quality of their healthcare or tuition, even after the event. See also VW: it's easy to lie about details which affect the quality. (2) Increasing perfection of price discrimination: market participants charging different prices to different customers. Airlines can do this because of the ID requirements and non-resaleable tickets. Private healthcare can do this too. (3) Switching costs: Oracle win at lockin. Big problem in the software world, but also for tuition (incomplete courses not portable). (4) Regulatory capture & paid lobbying: applies to pharmaceuticals, textbooks, DVDs, healthcare.

roymurdock 11y ago
In summary: frictions (informational, capital, & regulatory) that distort the efficiency of free markets, which technology can help solve. In the context of the college discussion, it's largely informational and regulatory. How can you judge the value of a huge intangible such as a college education? How is the government structuring loans and the public school system to provide alternatives to the price of education on the free market?
rm999 11y ago
The information issue with healthcare and education is even more perverse than in "Market for Lemons" - it's not that the quality of the product is unknown (although it often arguably is), it's that the price is unknown. As the article says, incoming freshman have no idea how much their 2nd through 4th years will cost, just an upper ceiling. They are usually misled to believe their final tuition will be lower than it actually is, skewing their value judgement. Likewise with healthcare, I often get surprise bills from my insurance company for just doing what my doctor instructs me to do. There's a lot of incentive for doctors to do unnecessary procedures without explaining the costs.

danharaj 11y ago

Consider the transaction costs of figuring out which university is actually the best for you. They are high. Transaction costs are high in almost every market. Go to the supermarket. There are 10 brands of raspberry jam. Huzzah! The free market's competition at work! How much time are you willing to spend figuring out which of the 10 brands is the best for you? The free market model assumes a variety of unrealistic conditions between buyers and sellers. The idea is that reality is close enough that the models still work. When the models don't work, instead of questioning the wisdom of the soothsayers and keepers of the economy, the economy itself is blamed. > It used to be that goods and services would compete on price and quality. If someone could offer the same quality for less, buyers would go there. It was self regulating to some point: predation was limited by the system I don't think this was ever true. So many cultures across all time periods have complained about charlatans and cheats, robber barons and the greedy rich. A lot of people think regulations exist because people are sour and can't handle being losers in the free market, or something. If you trust peoples' sense of fairness then the more likely scenario is that people have been getting cheated for a long time. Why are regulations so ineffective? Intelligence is like water. If it flows towards some goal, it will flow around all obstacles to get there. Regulations are like trying to dam a river by putting a giant concrete block in the middle of it. It could work, but only if you're far, far smarter than the collective human intelligence you're trying to control. No one is, though. So every generation sees a new set of regulations, a new form of economic institutions, and a new nervous illusion of stability that will eventually give way to crisis and a new ideology of regulations and economic institutions. It should come as no surprise that an adversarial system whose purpose is to allocate economic and political power leads to such abusive behavior.

a3voices 11y ago
> figuring out which university is actually the best for you It's even further complicated by the definition of "best". What is any given student optimizing for: Lifetime earnings? Some vague notion of happiness? Culturally fitting in? Chances of getting an elite job position eventually? Not all of these are tied to economics and prices.
- lfowles 11y ago