Friday, December 30, 2005

The EPA and your wallet

One of the more intriguing results in Thaler’s The Winner’s Curse is the idea that people have an idea of “fair” pricing. The common example is splitting $10 between two participants—Player 1 splits the amount between the two, though both have to agree to the respective amounts in order to actually receive the money. Theory dictates that Player 2 should accept any non-zero amount (as it’s money that they otherwise wouldn’t have)—but in practice, if the amount is viewed as insultingly low (say, $0.05), then Player 2 will reject the bid in Seinfeldian spite and no one gets anything. Evidently, people care not only about their relative values for goods, but about others’ respect of those values.

I can’t help but to think that this is at least partially related as to why people are so upset about paying “too much” for gasoline. People value gasoline at its current price—after all, they are at the pump getting mad—but they remember paying less, and somehow the price increase is insulting. It’s popular to point the finger at oil companies (after all, they have big ships that hurt baby seals), OPEC and natural disasters, but this points to another explanation. As the EPA continues to levy regulation upon regulation, prices continue to rise—and the government is obviously not going to blame itself for the discontent of millions.

It raises an interesting question—who is doing a better job of keeping gas prices high: OPEC, or the EPA? I don’t think either of these are the primary reason as to why gas prices have climbed to their current level—nonetheless, I’d love to see a paper on that topic. OPEC’s effect, I’d imagine, has probably been subject to a Harberger-related estimation. The EPA causes higher prices directly via quality controls, but also introduces a whole host of public choice-related inefficiencies. I’d suspect that the EPA has a rather sizable effect on gas prices. Extend it from the EPA to the entire government and gas taxes could be added in as well.

Higher demand causes higher prices—but so does regulation. The finger should point in that direction too.

Collective Goods and the State

In The Logic of Collective Action, Mancur Olson offers an interesting criterion for judging when economic freedom should be infringed upon. He believes that "it is the provision of collective goods and services, not the public or private nature or other characteristics of the institutions that provide these services, that largely determines whether economic freedom must be curtailed".

I am chary of claims of this nature. Olson argues that private cartels that enforce restrictionist prices are guilty of reducing economic freedom. However, it is nearly impossible for private firms to do this, and as Rothbard has pointed out, it is not possible, given a lack of perfect information, for outsiders to accurately assess to what extent cartelization is occurring. While Olson argues that the public or private nature of the institution is not important, the statement really suggests that someone must decide when a collective good is present and when economic freedom should be curtailed. This is, presumably, the government's role.

There are several problems with the idea that government can identify and solve collective goods. First, good government is a collective good itself. Jeffrey Rogers Hummel has argued that if government can overcome the collective good of good government, then the market can overcome the collective good the government is attempting to solve all by itself. If the government cannot produce the collective good of good government then it certainly shouldn't try.

Secondly, government failure represents a very real concern for those that would use the State to produce collective goods. The literature of Public Choice economics is filled with examples where the government does not face a set of incentives that is conducive to achieving the given ends. Additionally, the government lacks the signaling mechanism of the market to efficiently allocate resources.

The burden of proof for infringement of economic freedom should require not only the identification of a collective good that the market cannot provide but also sufficient evidence that the government will be able to provide the collective good without making things worse in other areas. There are very few instances in which this is true. Production of collective goods by the State is a dangerous good indeed.