How A Lack of Accurate Information Can Lead to Inefficient Outcomes in Transport Markets
In which we discuss problems of Moral Hazard and Adverse Selection
Contrary to what some people might tell you, economists typically do not believe in the unassailable supremacy of free markets (laissez-faire economics). Even Adam Smith (the godfather of modern economicds) knew market failures exist, such as:
Market power: exists when a business has the power to earn economic profits over the long run because sufficient competition can be blocked due to barriers to entry. Some barriers to entry are even purposely created by governments, such as cabotage laws which restrict foreign competition in Canadian airline markets.
Externalities: exist when the actions of people involved in a transaction affect bystanders who are not directly involved in said transaction. These externalities can often be negative, such as when gasoline-powered vehicles pollute the environment for everyone — even those who do not drive them. However, there are also positive externalities, such as when a company makes investments into research and development for more environmentally-friendly forms of transport.
Pure public goods: taken at the extreme, when a public good is offered, there is no way to make someone pay for it (it is “non-excludable”), and everyone can use it at the same time (it is “non-rival”). This is contrary to a pure private good which is excludable and rival. The private market will be unwilling to provide something for which they cannot recoup their costs because customers are “free-riding”, so there can be a role for government to fund the production of the good or service through tax revenues, if not providing the good or service itself. For example, a non-toll road that is uncongested is non-excludable because no one is charging a toll, so anyone can use it; it is non-rival since it is uncongested, so the fact that some people are using it does not stop anyone else from using it.
Common resources: again taken at the extreme, a common resource is also non-excludable but also rival. For example, an congested non-toll road is rival because there is not enough space on the road to fit everyone who wants to use it. A non-transport example is fish in the ocean: non-excludable since the government cannot effectively stop people from fishing along such a long coastline, but rival because the fish I catch (and keep) cannot be caught by anyone else, and there are now fewer fish in the ocean.
Natural monopolies: these goods are non-rival but excludable. For example, Telus can exclude us from using its long-distance phone services if we do not pay for them, but anyone can use them simultaneously if they also pay for them. A transport-related example is an uncongested toll-road: the toll excludes anyone who wants to ride for free from using the road.
Lack of clearly-defined property rights that are effectively enforced.
But today, your Ride On writers want to address a market failure which applies in various ways to transportation markets and their affiliated industries: informational asymmetries, whereby the two sides of a transaction have different information so there are uncertainties for at least one side of the transaction. These differences might enable the person with superior information to take advantage of the other person; the latter person recognizes their vulnerability, so they will change their behaviour to protect themselves from such exploitation, thus leading us to a sub-optimal equilibrium.
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