Thursday, February 14, 2013

Economic Problem of Self-Reference

What goods should government provide for, directly like public schools or indirectly like health insurance and mortgage subsidies, and what goods should be left to the free market?

In a concrete instance of a problem of self-reference, the government should provide for the prerequisites of the market.  The market itself cannot provide these things by definition.

What are such prerequisites?  One example, one that is uncontroversially provided for by the public sector, is the protection of negative rights, i.e. to bodily autonomy and property.  But what else is needed for a functioning free market?

In a free market, competition among sellers for consumer demand puts upward pressure on quality and downward pressure on prices.  Consumer choice is the mechanism of that pressure.  But for consumers to be able to make choices, they have to be able to travel to different vendors.  They have to be able to get the information of who is selling what, of what quality, at what price*.  They have to be able to reason about and investigate their options to get the best deal on price and quality.  So it sounds like transportation, information (including disclosure of production standards), and education are prerequisites of a functioning market.  Currency seems like another likely contender.  

This is not to say that we must have single-payer public systems only for transportation, information transmission, and education, but only that there seems to be a case for their subsidization, which can occur on a spectrum.  Maybe they're even public goods because we all benefit from the upward pressure on quality and downward pressure on prices that they facilitate through the free market.  

*Consider trying to figure out what internet and phone plan to buy from what company; you can't look up the different options online or call the sales departments or you wouldn't be trying to buy service in the first place.  How about trying to shop around for health care or health insurance while you're laid up with an injury or even unconscious?

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