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Re: Madness: Bailing Out Greed in Wonderland
From: David Farber <dave () farber net>
Date: Wed, 17 Sep 2008 14:56:19 -0400

Begin forwarded message:

From: Rahul Tongia <tongia () cmu edu>
Date: September 17, 2008 2:45:59 PM EDT
To: Russ Nelson <nelson () crynwr com>
Cc: dave () farber net
Subject: Re: [IP] Re:     Madness: Bailing Out Greed in Wonderland


I was certainly and purposely oversimplifying, and yes, the real world works without perfection. My main point was that those who scream "FREE MARKETS = no regulation" need to consider strategic regulation as necessary. Externalities are just one example. Setting up the rules of the game are another. My own work has been looking at regulation of power and telecom markets, and, more so in the power system, markets on their own are a myth. If you're keen, I encourage you to read work by colleagues at Carnegie Mellon's Electricity Center (CEIC) (www.cmu.edu/electricity) that shows how even with no collusion, and no market power (no supplier has more than the reserve margin) one will drift towards pure producer surplus instead of any consumer surplur, and even some societal loss in some cases. Much of my work has looked at developing regions. I am perfectly aware of the adage that the cure is often worse than the disease, and some of it may apply to regulation. But I wager that those who are winners vs. losers (with uncertainties and risks) are not the same stakeholders. So regulation is a policy choice as much as a vehicle towards "optimality". In an ideal world, we would separate and make transparent THOSE two, and at least make any linkages clear.



p.s. Your blog/webpages appear to be down (?). Just FYI.

Russ Nelson wrote:
For IP if you wish, David.

David Farber writes:
> If nothing else, I always remember from Econ 101 that "free
> markets" need essentially perfect information.

Gosh, Rahul, then it seems like you remember nothing.  To have a
perfectly efficient market, you need zero transaction costs and
perfect information.  Anything less and you don't have perfection.
Is that a problem in the real world?  No, of course not.  Everything
has friction and yet we manage to get things done.

Because politicians love to fiddle, no market escapes regulation.
However, you can compare a *more* free market to a *less* free market,
and come to conclusions about the value of freedom to trade.

My own feeling?  We need separation of markets and state.  You may
gasp "Not possible!  What about market failure?!?"  And yet when our
country was founded, all governments chose the religion that their
citizens would observe.  Religious freedom was thought to be
impossible; a sure road to hell.

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