Chapter 9: The demand for and supply of assurance
1 Daniel B. Klein QUALITY AND SAFETY RESTRICTIONS Many agree that the consumption and production of bread are best left to voluntary processes. But many who favor free enterprise for such tangible goods oppose it for matters of quality and safety. The economist Jerome Rothenberg (1993) says: ÔThe marketÕs myriad decentralized actions do not themselves ensure adequate safety. Centralized controls of various sorts are needed. These have been instituted in the form of regulations, constraints, information programs, licensing and certificationÕ (172). Sometimes economists and others espouse quality and safety restrictions such as housing codes, occupational licensing, pharmaceutical approval, consumer product recalls, financial exchange regulations, and workplace safety regulations. I will offer a formulation of these matters that suggests that the broad reasons we favor free enterprise in bread carry over to quality and safety issues. TRUSTERS AND PROMISERS Many transactions involve promises of quality and safety that cannot be fully verified before the fact. One party decides whether to trust the other to deliver what is promised. A consumer decides whether to trust the grocer or pharmacist or mechanic to deliver the quality promised. A merchant decides whether to trust a prospective employee. A landlord decides whether to trust a prospective tenant. The canonical example is a creditor deciding whether to trust a borrower who promises to repay the loan. The trust relationship is clarified by Figure 9.1. Truster (the creditor) decides either to trust or not trust Promiser (the prospective borrower). If Truster decides to trust, then Promiser...
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