radford@calgary.UUCP (Radford Neal) (11/04/85)
For some time people have been argueing about the following scenario: In some town, there are many sellers of used cars, which vary in quality. The owners of the cars know how much they are worth, but the potential buyers don't, they only now the average worth. Everyone is assumed to be maximizing their profit, without regard to any ethical inhibitions about selling junk. As a result, the price of a used car must reflect the average value, otherwise it would not be a good gamble for the buyer. Sellers of better cars can't get the price they deserve, so they may drop out of the market, further depressing the average worth of those left in the market, leading to a lower price, further sellers dropping out, etc., until there are no cars sold. This is said to demonstrate something about free markets being flawed. (I've long since forgotten the original poster's exact point...) The postings on this subject seem to me to be singularly unenlightening. A few points: 1) Limited information is an essential characteristic of the real world. Saying the free market is flawed because not everyone knows everything is silly. 2) Paying a mechanic to evaluate the cars is therefore not an unreasonable thing to expect of the buyer. 3) There is no reason to expect any other economic system to be able to avoid this cost of acquiring information. If the government sets the prices it will still have to pay the mechanic to evaluate the cars. 4) The only way to avoid this cost is to have the seller, who already knows the car's worth, tell the truth to the buyer. This might arise from moral virtue or threats of retaliation. Whether it does happen is quite unrelated to whether the subsequent exchanges take place in a free market. So I fail to see what this example was supposed to prove. Would the original poster like to comment? Radford Neal