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Information 1 G406, Regulation, ch. 8 Eric Rasmusen, November 7, 2013.

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Presentation on theme: "Information 1 G406, Regulation, ch. 8 Eric Rasmusen, November 7, 2013."— Presentation transcript:

1 Information 1 G406, Regulation, ch. 8 Eric Rasmusen, November 7, 2013

2 An Overvalued Product 2

3 A Worthless Product 3

4 A Harmful Product 4

5 An Overvalued Product with Upward Sloping Supply 5

6 OxyElite Pro 6 This drug is banned for athletes. It killed two soldiers.

7 7 OxyElite Pro Close-up

8 Homeopathic Medicine 8 As Weight Loss XL amounts to just one fluid ounce to last you 30 days, you are essentially putting a drop under your tongue three times a day which contains little bits of: Antimony, Honey bee (yes, ground-up honey bee) Pepper extract, Bladderwrack Bedstraw extract, Garcinia hanburyi Witch hazel, Dried sheep/cow liver Histamine dihydrochloride,Strychnine nut extract Dried sheep/cow pancreas, Parsley Northern whitecedar extract, Sheep thyroid gland Ginger root

9 New York Restaurant Grades 9 But is an A posted in the window really a sign of a good restaurant?

10 A Private Solution: Civil Suits 10 The plaintiff brings suit against the defendant, asking the court to make the defendant pay him damages. Its a tort case if the allegation is that the defendant injured the plaintiff, a contract case if its the he broke a contract. Either side can demand a jury trial. The jury uses preponderance of the evidence as a standard rather than beyond a reasonable doubt, and it only needs a majority vote, not unanimity. In rare cases, the jury can add punitive damages. These are only for intentional or reckless harm, in tort cases.

11 Liability Rules 11 The negligence rule: Was the defendant ``negligent'' in causing or failing to prevent the injury, or was he taking enough care and should not be blamed for the harm? The comparative negligence rule: How negligent was the defendant compared to the plaintiff? If both are equally negligent, then the plaintiff would pay only 50% compensation. The strict liability rule: The defendant must pay if he or his product caused the harm, even if if he took all reasonable precautions.

12 Negligence vs. Strict Liability 12 Suppose that a car company can choose from three levels of safety: spending $20 million for a low level, $50 million for a medium level, and $100 million for a high level. Consumer accident costs will be $150 million if the safety level is low, $80 million if it is medium, and $60 million if it is high. What should the car company choose under a negligence standard? What should the car company choose under strict liability?

13 Solutions to Asymmetric Information Impose a minimum quality. Good if everyone would want to pay for at least that minimum quality. 2. Require truthfulness. This is is always good, though defining truth is hard sometimes. Best hamburger in the world is mere puffery. 3. Require disclosure. Vitamin lists on cereal boxes. 4. Offer government information. 5. Require all sellers to be tested, and disclose that information. 6. Impose a default minimum quality, but let consumers opt out. 7. Rely on seller reputation. 8. Teach people that they should be honest as a moral duty.

14 Solutions I Impose a minimum quality. Good if everyone would want to pay for at least that minimum quality. 2. Require truthfulness. This is is always good, though defining truth is hard sometimes. Best hamburger in the world is mere puffery. 3. Require disclosure. Vitamin lists on cereal boxes. 4. Offer government information. Cocaine:

15 Solutions II Require all sellers to be tested, and disclose that information. Star+Safety+Ratings/2011-Newer+Vehicles 6. Impose a default minimum quality, but let consumers opt out. See the pictures at

16 Solutions III Rely on seller reputation. Reputation helps cure the temptation to offer low quality. A seller with good reputation can charge more than marginal cost and make an economic profit. If he does, he earns positive economic profits which are a hostage that dies if he ever deviates to low quality. The need for reputation makes it hard to enter such a market. Reputation therefore does not solve the problem completely.

17 Solutions IV Teach people that they should be honest as a moral duty. The taste for well-being is the prominent and indelible feature of democratic times....The chief concern of religion is to purify, to regulate, and to restrain the excessive and exclusive taste for well-being that men feel in periods of equality; but it would be an error to attempt to overcome it completely or to eradicate it. Men cannot be cured of the love of riches, but they may be persuaded to enrich themselves by none but honest means. de Tocqueville, Democracy in America

18 A Second Market Failure: Processing Information Badly 18 You can fool some of the people all of the time; you can fool all of the people some of the time, but you can never fool all of the people all of the time.

19 The Muller-Lyer Illusion 19

20 106 Visual Phenomena & Optical Illusions by Michael Bach Michael Bach 20

21 Anchoring 1. Write down some color of the clothing you are currently wearing. 2. Write down your mothers first name. 3. Write down the last two digits of your social security number. 4. Write down your estimate of the age of my relative who is named Ross. See 21

22 Anchoring 22 MIT's Professor Ariely conducted a mock auction for chocolate with his MBA students. First, students had to write down the last two digits of their Social Security num- bers. Next, they submitted their bids. The half of the group with higher two-digit numbers submitted bids from 60 to 120 percent higher.

23 The Representativeness (or Availability) Heuristic 23 Below is a description of Steve, a person chosen at random from the U.S. population. What occupation is Steve in--- farmer, doctor, salesman, or librarian? What is the probability he is a librarian? Steve is very shy and withdrawn, invariably helpful, but with little interest in people, or in the world of reality. A meek and tidy soul, he has a need for structure, and a passion for detail.

24 Employment 24 Librarians: 160,000. Salesmen (wholesale and manufacturing): 2 million. Farmers: 1.2 million. Doctors: 660,000. Steve is very shy and withdrawn, invariably helpful, but with little interest in people, or in the world of reality. A meek and tidy soul, he has a need for structure, and a passion for detail.

25 The Disjunction Fallacy Which are more common in the English language: 1. Words ending in ing 2. Words ending in z 3. Words ending in g (Also: The Decoy Technique) 25

26 How Scared Should You Be if Your Cancer Test Says Cancer? 26 Suppose that a cancer test is 90% accurate, in the sense that if someone has cancer he will test positive (meaning the chemical does change color) with 90% probability, but in the population only 2% of people have cancer. If someone does not have cancer, the test is 80% accurate and the chemical will not change color. Use Bayess Rule:

27 Nudging: Nationwide Mutual 27 Around 74% of Nationwide employees were enrolling each yea in 401-k programs. In 2007, the company changed its policy. Enrollment was still voluntary, but each employee was automatically enrolled, and had to pro-actively ask to be removed. Moreover, each year the employee contribution would rise unless the employee objected. Just 6% of employees still opted out of the program, but the enrollment rate had increased to 94%.

28 A Nudge Tactic 28

29 Cigarette Warning Labels 29

30 Cigarette Warning Label Requirement Struck Down 30 It was struck down as violating the 1 st Amendment, being compelled speech that goes beyond just listing facts. (DC case) Other of the proposed labels are too gruesome for me to show here. But today (March 20, 2012) the 6 th Circuit appeals court ruled them constitutional. (Kentucky case). When different federal courts disagree, the Supreme Court has to decide points of law. The government decided to give up on the labels.

31 Random Sequences 31 Do men like to gamble more than women do? Are gamblers overconfident, or just risk-loving?

32 Two Types of Error False Positive: the FDA says a drug should be approved, but it is unsafe. False Negative: the FDA says a drug should not be approved, but it is safe. 32

33 Mill: Higher Pleasures [Of the higher pleasures] Now it is an unquestionable fact that those who are equally acquainted with, and equally capable of appreciating and enjoying, both, do give a most marked preference to the manner of existence which employs their higher faculties. (John Stuart Mill, 1800s utilitarian and writer of the leading economics text of the time) 33

34 Mill: Happiness vs. Contentment Whoever supposes that this preference takes place at a sacrifice of happiness- that the superior being, in anything like equal circumstances, is not happier than the inferior- confounds the two very different ideas, of happiness, and content. It is indisputable that the being whose capacities of enjoyment are low, has the greatest chance of having them fully satised; and a highly endowed being will always feel that any happiness which he can look for, as the world is constituted, is imperfect. 34

35 Mill: Socrates and Swine But he can learn to bear its imperfections, if they are at all bearable; and they will not make him envy the being who is indeed unconscious of the imperfections, but only because he feels not at all the good which those imperfections qualify. It is better to be a human being dissatisfied than a pig satisfied; Better to be Socrates dissatisfied than a fool satisfied. And if the fool, or the pig, are of a different opinion, it is because they only know their own side of the question. The other party to the comparison knows both sides. 35

36 Info Is Not Enough: Mushrooms I survived the Destroying Angel 36

37 BEPP Majors How high is the ceiling of this room? 1. Remember an answer. 2. Say I dont know. 3. Figure out an answer using several steps. 37

38 Obamacare: ProPro Rather than apologizing for these cancellations, [the administration] should be bragging about them.... Imagine a new law enacted to promote food purity. As it is being debated, you are told if you like what you eat, you can keep on eating it. The new law takes effect, and one day you find that the market no longer carries certain foods you have been buying... [which] included elements found to be bad for your health. The pure food act barred their use. Obamacare is analogous.... It bars certain common practices of insurance companies that most people find unacceptable at best, outrageous at worst... Currently available insurance plans that include such practices will not be allowed on the market. 38

39 Obamacare: ConCon Suppose BHO Insurance Co. decides it wants to corner its state's market in automobile coverage. It begins an aggressive ad campaign offering a too- good-to-be-true deal: Sign up with us, and we'll give you better coverage at lower premiums. We're so sure you'll love our deal that if you like the terms of your existing policy, you'll be able to keep them--GUARANTEED! The ad campaign, with the company's charismatic president acting as pitchman, is a smashing success. The competing companies lose so much business that they declare bankruptcy or are acquired by BHO. But BHO's policies are more expensive, and they include "comprehensive" coverage most customers neither need nor want. Take it or leave it, the company says, reneging on its guarantee in the knowledge that state law requires cars to be insured before they can be driven on public streets. 39


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