Friday 27 February 2015

This is what happens when you don't read Demsetz

Way too many policy arguments take the following form.
  1. Markets in an ideal world are efficient.
  2. Here is a potential deviation of the real world from blackboard conditions, so we're in a second-best.
  3. Policy can ameliorate outcomes when there is a market failure. So, here's what we must do.
What's missing? Any evaluation of whether the policy cure is actually an improvement on the status quo. Some policies are like using tweezers to pull out an irritating splinter - great idea. Others would have you hack off the arm to avoid the splinter. 

Harold Demsetz very nicely made this point way back in 1969. He was there critiquing Arrow on information market failures, but the lesson is more general. It isn't enough to simply point out a potential market failure. Markets fail but policies don't automatically induce nirvanas. We need comparative institutional analysis to tell us which world sucks less: the world with a market failure that isn't addressed by policy, and the world in which a real-world policy involving actual tradeoffs comes in to try to solve it.

Today's lesson in "this is what happens when you don't read Demsetz" comes from Dean Baker over at Cato Unbound.

Baker's argument:
  • In a first-best world, we would have proper congestion charging and the like;
  • We don't have proper congestion charging;
  • Taxicabs can increase congestion;
  • Uber likely increases the number of cabs;
  • Therefore we need a complicated regulatory structure for Uber imposing fees by time of day and location of service.
Baker also reckons that while Uber's drivers are contractors, not employees, and despite that those drivers like the flexibility, the drivers should be treated like employees for minimum wage and overtime purposes.

Some folks just hate the idea of voluntary transactions among consenting adults that don't route through the State somehow along the way. 

A couple things to note:
  • It's eminently unclear that Uber increases congestion. In the longer term, it will reduce the amount of street space that need be devoted to parking, freeing up more road for driving. It will also reduce peoples' need to take a car for the day because of that one trip they need to make mid-day and instead let them commute in using the bus, then take an Uber for the part when they do need a car. 
  • Using charges on Uber to solve congestion instead of broad-based congestion charging is nuts. Unless Uber is a very large proportion of cars on the road, having any effect on congestion using charges on Uber would have to involve just massive variability in ultimate Uber charges on consumers, which would deter any use of the service. I favour congestion charging, but implementing it on Uber only makes as much sense as imposing congestion charging only on blue cars. 
Update: a reader points out that Uber surge pricing is already a form of congestion charging. It's a good point.

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