Regulation and Cheap Stuff

A quick followup to my last post. One question that libertarians sometimes ask is why the government should be involved in product safety regulation. Let's say you've got n manufacturers of cheese, with the safety of their products evenly spaced along a spectrum. And let's say it's readily apparent to the public how safe each cheese is. Isn't it reasonable that someone with limited resources might choose one of the cheaper, less safe cheeses? Maybe that's better than no cheese at all. If the government steps in and imposes minimum safety regulations, then all that has happened is certain manufacturers have been put out of business and certain poor people have been denied cheese.

This is of course very stupid, but it's worth thinking about why it's stupid. To me the answer is that in reality people are very bad at figuring out how safe cheese is. (By contrast people are pretty good at figuring out how tasty cheese is, and there's no need for tastiness regulations.) If you end up with a world in which safety is strongly correlated with price, but people have limited information, then bargain-hunting becomes a very difficult thing to do. You never know if this half-price-off cheese is cheap because the retailer accidentally ordered too much, or because listeria was found in the warehouse where the cheese was stored. You can't shop around for cheap cheese without putting your family's health at risk.

By contrast, if all cheese is required to be reasonably safe, then bargain-hunting becomes a totally reasonable thing to do. This means that manufacturers and retailers can compete on price without signaling that their product is unsafe. This, in turn, drives down prices (at least at the low end) and facilitates a market in economical cheese, which might not exist in an unregulated system.

Now you can imagine all of this happening without government involvement. You can imagine a certifying organization that runs safety checks on a voluntary basis and controls a label that only reasonably safe cheese is allowed to use. Then people would shop for bargains within the universe of safety-labeled cheese, and truly desperate people would buy the unlabeled stuff. This is the kind of model libertarians hang their hat on, and it's not totally crazy. (In fact, when it comes to product quality, we use this kind of system all the time. I believe it is also how compliance with religious dietary restrictions are monitored/communicated. By contrast allergen labels are mandatory.)

Anyway it's a thought experiment. But much the same logic applies to Amazon's counterfeit goods problem. In a world where Amazon reliably delivers the product that you order, you are free to look for the lowest price possible. Unfortunately that's not the world we're living in. You can never tell whether you've found an amazing price on an LCD monitor because of a temporary oversupply or because someone has just manufactured a run of counterfeit Samsung monitors.

Of course with Amazon the rot goes deeper—even if you go out of your way to buy from a reputable retailer on the platform, foregoing suspiciously low prices from scammy sellers, your order may be fulfilled from a scammy seller anyway. So in a way my point doesn't apply to the Amazon situation. But in general maintaining standards helps people by making it safe to buy an economical option.