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From: laura@l5.uucp (Laura Creighton)
Newsgroups: net.politics.theory
Subject: Re: The free market
Message-ID: <221@l5.uucp>
Date: Sat, 26-Oct-85 20:21:19 EST
Article-I.D.: l5.221
Posted: Sat Oct 26 20:21:19 1985
Date-Received: Thu, 31-Oct-85 21:07:54 EST
References: <225@gargoyle.UUCP>
Reply-To: laura@l5.UUCP (Laura Creighton)
Distribution: net
Organization: Nebula Consultants in San Francisco
Lines: 69

In article <225@gargoyle.UUCP> carnes@gargoyle.UUCP (Richard Carnes) writes:
>
>"[Akerlof] argued that the seller of a used car knows whether or not
>it is a lemon; the buyer has to play the averages, knowing only that
>some cars are lemons but not whether the particular car he's buying
>is.

Wrong-o.  The buyer can get an expert opinion from his local mechanic,
remember.

>  Buyers will pay only a price that reflects the average frequency
>of lemons in the used-car crop.  That average is a high price for a
>lemon but understates the worth of the better cars offered on the
>market.  The owners of the better cars are reluctant to sell at a
>price that makes allowance for the lemons that other people are
>selling; so the better cars appear less frequently on the market and
>the average frequency of lemons increases.

Wrong again.  The sellers of the good cars will instead come up with a
way to demonstrate that they have better than lemon cars.  Again, they
will get their cars certified by the local mechanic.

>  As customers learn this,
>they make a greater allowance for lemons in the price they're willing
>to pay.  The cars of average quality in the previous market are now
>undervalued and their owners less willing to sell them.  The
>percentage frequency of lemons continues to rise.  In the end, the
>market may disappear, although institutional arrangements like
>guarantees, or the certification of cars by dealers who exploit a
>reputation for good cars, may keep the used-car market alive.  

What is institutional about the arrangement?


>
>"Akerlof generalized this model to a number of markets in which there
>is unequal information on the two sides -- insurance companies know
>less than you do, usually, about whether you are accident prone, or
>susceptible to hereditary diseases, or are contemplating suicide.
>Life insurance rates for sixty-five-year-olds must allow for a large
>fraction who are not long for this world.  And those who know they
>are healthy and have a family history of longevity and are exposed to
>few risks have to pay the same premium as the poorer risks; life
>insurance being unattractive at that price, few of them buy it.  The
>average life expectancy of the customers goes down, the rates go up
>further, and the bargain now looks poor even to those of normal life
>expenctancy.  And so forth."  [T. Schelling]

But this is only news to those economists who had claimed that there
was equal information on both sides.  It is particularily ironic that
*they* should make this mistake, because economists are primarily in
the business of SELLING INFORMATION, and opinions or theories which are
their thoughts on information.

As a practical matter, insurance companies stay in business.  It is even
possible to get insurance altered when you can provide good information
to the insurance companies that you are a lower risk than the statistical
average. (For example, some states and some provinces give (or gave) a lower
automobile insurance rate to straight-A high school students than others.
Abstainers from alcohol can get a much lower rate on all sorts of insurance.)

-- 
Help beutify the world. I am writing a book called *How To Write Portable C
Programs*.  Send me anything that you would like to find in such a book when
it appears in your bookstores. Get your name mentioned in the credits. 

Laura Creighton		
sun!l5!laura		(that is ell-five, not fifteen)
l5!laura@lll-crg.arpa