Wednesday, August 10, 2005

Gas Again

Seeing all those gas stations reminded me that government regulation, by standardizing a product, can be very good at creating price competition. Once you can assume that every seller has basically the same quality product, you really don't care about anything besides price. I ended up buying gas at "U Pump-It," a rather sketchy looking place; in my bourgie way, I would not normally patronize such establishments, but given that I didn't have to wonder about quality...

The problem with this understanding of government regulation (which is consistent with the second view of economic liberty discussed here) is that it greatly dissuades quality improvement or innovation. That is, once a company can meet the baseline standards, and if consumers recognize those standards as good enough, then a company has no reason to improve the product. At the moment the regulations are published, perhaps they represent almost the cutting edge. But by time t+1 or t+2, you may have sacrificed quality improvement over the alternate reality in which you had "Consumer Reports" reading customers varying their buying based on quality.

So government regulation can impose an official floor on quality which implies a de facto ceiling. Without the floor, you may well have incentive to raise the ceiling, but you can also move into the basement (so long as you can still sell to customers). All well and good, if customers stay informed of quality. But it also raises the possibility of much misleading of consumers, which would necessitate far more energy on the part of consumers to ferret out good quality gas at a good price than under the present regulatory regime. It is probable, though, that the costs imposed on consumers of figuring out quality would exceed the benefits of letting them buy the quality they wanted, even with all those quality improvements. Thus, for some products it does make sense for government to standardize the product.

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