How the Promise of Future Subsidies Can Freeze Markets

I think Casey Mulligan nails it:

The [Chicago city] council has debated mandating hybrid purchases. But the rumor among taxi drivers is that in addition, or perhaps instead, the city or other government agency will eventually subsidize the purchase of a hybrid.
Drivers have decided that they should not purchase a Prius or other hybrid until the subsidy arrived. Buying one now would mean over-paying.
Regardless of whether it is realistic to expect Chicago to someday subsidize purchases of hybrid taxis, the fact is that some cab drivers are considering the possibility. If taxi drivers consider future subsidies in their industry, then so must bank executives.
Last fall the public learned that banks were not selling many of their legacy mortgages and mortgage-backed securities, despite the impression that ownership of the assets were hindering the banks’ lending. A variety of theories have been put forward to explain this failure, and to suggest what the government might do to fix it.
But the lack of trade in mortgage-backed securities may have something in common with the lack of trade in hybrid Chicago taxicabs. The secondary market for legacy mortgages may have stagnated largely because of the (ultimately correct) anticipation of a huge government subsidy.

13 Replies to “How the Promise of Future Subsidies Can Freeze Markets”

  1. Yep that really helped me to understand the need to regulate companies. They do their job by maximizing the profit without regard for externalizes. When their externalities are negative and impose on those around hem then it’s time to bring out the regulators.

    1. And, then, what do you think will motivate the regulators? When their activities produce negative externalities, do you expect them to risk their own budgets and power?

    2. Or, instead of wasting money with ineffective, and circumventable regulation, we could just get rid of laws preventing those responsible from being held accountable for their actions. If a corporate officer new that he personally could be charged with murder and face the consequences for his decisions, he might be a bit more inclined to “make the right choice.” Don’t you think? The excess of law is what’s causing the injustice, not the cure.

  2. I agree with muirgeo. But I don’t consider low wages, lack of cozy independent stores, or increased consumption of unhealthy foods to be legitimate negative externalities. Carbon emissions, yes, although it’s very difficult to quantify how much.

  3. This experiment says more about the respondents’ assumptions regarding corporate intent than about the inherent morality of the profit motive.
    Tangentially, last night I viewed the 1950 Kurosawa film Rashomon which subtly deconstructs the role worldview and preconceptions play in the perception and understanding of events and ultimately the very nature of truth. The title has been used to describe the clash between positivist and interpretivist assessments of contested events; The Rashomon Effect. (A relevant 2002 paper at the link.)
    That said, I do agree that what are commonly referred to as externalities (incidental byproducts of economic activity) at present are not effectively integrated into the price structure of goods. For a thought provoking examination of an alternative pricing structure that seeks to address harmful environmental externalities, I recommend Natural Capitalism [www.natcap.org]. The basic premise is that externalities are like friction on a system, i.e., waste — or lost profit potential. The goal is to utilize the profit motive to emulate natural systems’ modus operendi — Waste = Food — within business and industry.

  4. When the company president says, “I don’t care about [the environment]” he doesn’t seem to mean, “All nature offends me and I will do what I can to wipe it out,” but, “the environment is not a factor in this decision.” His intent is to maximize profit, and whatever happens to the environment will happen. It’s clear to be that environmental effects were not the intent of the decision, so I don’t think we can call those effects intentional in this case.
    Frankly, I don’t think this is philosophy so much as semantic quibbling.

  5. When the company president says, “I don’t care about [the environment]” he doesn’t seem to mean, “All nature offends me and I will do what I can to wipe it out,” but, “the environment is not a factor in this decision.” His intent is to maximize profit, and whatever happens to the environment will happen. It’s clear to be that environmental effects were not the intent of the decision, so I don’t think we can call those effects intentional in this case.
    Frankly, I don’t think this is philosophy so much as semantic quibbling.

  6. Neither action was intentional.
    The guy explicitly said “I don’t care about that. All I care about is the profit.”
    He didn’t care one way or the other, so neither action can be considered intentional.
    Why is this hard?

  7. The important question is not whether the environmental effects were intentional or unintentional. The important question is why so many people give different answers to the question of intent when nothing changes except outcomes. The definition of intentionality is boring; the *inconsistency* is interesting.

Comments are closed.