Friday, June 26, 2015

Regulations or market solutions?

Following Nevada's passage of a near-universal education savings account (ESA) program, some analysts are arguing for strict accountability of the ESA program. As Jason Bedrick writes,
One wonk went so far as to recommend that the state “set a high bar for the quality of services offered by providers” and “eliminate providers who consistently fail to meet the mark.” Another claimed that “no one but the purest Friedmanites think that the magic hand of the market will automatically lead to better outcomes.” Of course, there’s nothing “magic” about the “invisible hand” of the market—it’s just a metaphor Adam Smith used to describe the process of spontaneous order, by which the voluntary actions of disparate individuals organically form a system that is the result of human action, but not human design. 
So how does the market “magically” provide quality? Imagine you’re looking for a new dishwasher. As an average consumer, you know nothing about the mechanics involved in making a dishwasher, so the dishwasher manufacturers and retailers have a great advantage over you. Fortunately for you, without any government mandate, numerous organizations took it upon themselves to help you overcome this information asymmetry and ensure product quality. Some, like Underwriters Laboratories, provide private certification for dishwashers that meet their standards. Others, like Consumer Reports, provide expert reviews of hundreds of dishwashers and rate them on five criteria. And still others, like Amazon, offer a platform for consumers to rate and provide feedback about dishwashers based on their personal experience. 
In these ways, the market spontaneously channels expert knowledge and user experience to provide would-be consumers with needed information. It’s a messy process but, as scholars from the Mercatus Center at George Mason University show in a recent paper, it works better than having a Ministry of Dishwasher Quality define what makes a “quality” dishwasher and force all manufacturers into compliance.
Read more here.

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