Eco-nomics: Full Information and Efficiency

One of the requirements necessary for a free market to reliably achieve an efficient outcome is full and symmetric information. So this article on a smart electricity grid pilot project is pretty interesting. What this project did, in essence, is give customers real-time information on energy usage from all parts of the house.

Consert attached controllers on hot water heaters, air conditioners and pool pumps and then let customers go online and set targets for their monthly electricity bill. Smart meters and a wireless communications system provide real-time electricity consumption data to allow the utility to cycle appliances on and off to achieve the savings and help it manage peak demand.

The initial results are pretty dramatic: a 20% decline in average energy usage.

Regardless of the 'target' usage, what this system does is provide information to consumers about how much energy they are consuming and how much it is costing them. Not knowing this information apparently causes consumers to use more energy than they would in the full information setting. This suggests that current market outcomes for energy are inefficient (in the economics sense - we are not maximizing societal welfare) and that this inefficiency comes from an asymmetric information problem.

I think what this suggests in general is that if technology can allow consumers to understand the real-time monetary cost of energy usage, some pretty substantial conservation could be achieved, both in current consumption (like the pilot project) and in energy saving investments which, this suggests, would more likely occur if the true cost of energy usage were immediately apparent.

Beeronomics: An Economist's Preferred Honest Pint at Belmont Station

This escaped my attention until now. Via John Foyston, a message from Belmont Station:

A FULL 16 ounce PINT EVERY TIME. You asked for it, we're delivering. We are now using oversize glasses with a 16 ounce line. Be patient. Let it settle a moment. If it's not 16 ounces we'll top it up. More beer for you. Less waste!

Yeay! Kudos to them for going to marked glassware. I have not seen them, but I can only hope that the mark looks a little something like this:

Credit Cards, Asymmetric Information and the Role of Government in Preventing Bad Choices

The new credit card (and guns) bill is about to be signed into law and it begs the question: what is the market failure that this government intervention is suppose to correct?  After all, credit card contracts are full information - all the facts are there for credit card applicants to review - and if a private citizen in the United States wants to enter in a legal contract with another entity, why should the government prevent this?

The answer lies in whether you believe that by making extraordinarily dense and complicated contracts an asymmetric information problem exists despite this 'full disclosure.'  Most consumers cannot make sense of the contracts, supporters of the bill say, and companies deliberately make contracts dense and confusing so that they can slip all kinds of nasty little provisions designed to take advantage of customers once they are in debt to the company.  

If this is true than a bill that regulated the type of contract language that can be used, how explicit the terms must be, how accessible the language is to an average person not trained in the law is justified.  But if this regulation was successful in making consumers informed about what type of contract they sign, does the government have any role in regulating the type of contract they sign?  As an example, what if the contract very clearly stated: interest rate may be changed at any time by the issuer without prior notice.  If I was quite happy to agree to this provision, why should the government prevent me from entering into a contract such as this.  The bill just about to become law does precisely this.

The answer from some circles is that you have to protect people from their own tendencies to make bad choices.  But is this really the role of government?  Some bad choices impose serious costs to society like not wearing a seat-belt - in a crash your are more likely to be seriously hurt and many people will rely on public assistance to pay their medical bills and even those insured will have to pay higher premiums on average. Do bad choices in the credit card market impose such social costs?  I doubt it.  I know we are in an economic crisis partly fueled by just such credit shenanigans, but again the lack of full information is a main culprit and I am supposing that this part of the problem is solved through regulation.

I like, therefore, the parts of the credit card bill that stipulate more transparency, but I dislike the restrictions on the type of contracts that will be allowed.

I think that we need to be careful that government does not start to try and explicitly guide behaviors that have no or little social cost.  I am fine with mandating that nutrition information be available to customers of restaurants upon request but if we required restaurants to include such information on menus as some have suggested, I think we cross the line in this regard.  The private costs of poor choices are enough to ensure efficient market outcomes.

Now, where is that double cheeseburger with king sized fries I ordered?...