Visible Hands in the Economy
3. Markets may not always exist

Another problem occurs, as we said, when there is simply no market to provide a desirable good. This is the case of absent markets.

An absent market signifies the absence of trading in a desired good or service. The implication is that such a good or service has no market price.

Plainly there are many goods that lack a developed market. In the U.S. there is, for example, not much of a market for wooden shoes. No one cares much. A few people who like such shoes may be frustrated, but their number is too small to sustain wooden shoe makers and hence a market for wooden shoes. "Go buy some expensive Danish clogs at Water Tower Place," is the reply.

But there are also important goods without markets, very important. Consider, for example, law and order. People demand it in South Central Los Angeles as though it was a commodity like gasoline, and it is certainly costly to provide. It costs a minimum of $25,000 a year to keep someone in prison, for instance. Yet there is no market for law and order, at any rate over wide areas. Over a small area, such as a "gated community" in the hills overlooking Tucson, Arizona, big men with guns at the gate can, at a price, keep the residents free of crime. But not in the state of Arizona as a whole.

The problem is that nobody can "buy" law and order and yet exclude others from enjoying it. It's like a wide umbrella. Masha's parents in Russia may want very much to live in a safe city and may be willing to pay a lot for it. But they cannot exclude people who have not paid, who indeed refuse to pay, from getting the benefit of the police force. So it does not make sense for Masha's parents to pay a lot for a commodity that others will also enjoy. the non-payers are called in economics, and life, "free riders." Economists call law and order, at any rate over the wider areas we talk about, a "public" good. Gasoline, in contrast - or any good that can be enjoyed without having to share it with others - is called a private good.

A public good is any good or service that has to be consumed collectively. Consumption of such a good or service by one does not exclude consumption by others. A private good can be consumed privately with the exclusion of others.

People can free ride on the public provision of the good, getting the benefits without having to pay the costs. For example, on some of the tram lines in Amsterdam there is no one collecting tickets. The city depends on the honesty of the people, and on occasional inspections with large fines. Consequently, some people are literally free riding. But if many people don't pay, the tram service may have to stop.

It may not always be socially desirable to exclude people. For example, once Shakespeare's plays have all been written, they are a public good and it would be silly to prevent an additional person from reading them. The public-good character of knowledge---knowledge of "Hamlet" and knowledge of how to make an pill that helps AIDs---creates a dilemma. If no one pays for them, they don't get created. But once created the socially optimal price for them is. . . zero.

A related problem is that of public "bads."

A public bad is a commodity that has to be consumed collectively even though it provides negative enjoyment.

When your neighbor plays the stereo too loud you cannot be excluded from the consumption of the music even if you do not care for it. So the freshmen directing their stereo speakers out their dorm windows prove they are soooooo cool, but create a public bad. Smoke pollution is another example of a public bad. Your smoke becomes mine, whether I like it or not. There is no market in which I can refuse to buy the smoke, or in which I can hire a smoke-remover to take it away.

Actually, there is one way to "hire a smoke-remover": join groups that do not smoke. And so a businessperson notes an opportunity for profit in providing smoke-free restaurants. A developer can build condominiums in Naples, Florida too expensive for young adults. It's against the law to explicitly forbid young people with their stereo habits to buy a property. But a $500,000 price does the trick. Such self-segregation is called by economists the "Tiebout effect," after the economist who first noted it.

Another important source of absent markets is that informational asymmetry we spoke about. If the symmetry gets large enough, nobody buys or sells. If you simply cannot tell whether or not an apparently healthy horse on sale is going to drop dead next week, you won't buy the horse. If everyone knows that you can't know, then no one will try to sell, either, because they know that no one will buy. The market in horses breaks down entirely. It's pretty common.

And short of total breakdown, informational asymmetry prevents deals from happening that would have if the information could somehow be uncovered, spread, certified. The federal Food and Drug Administration, and the numerous local laws of food inspection, certify that buying at the Greasy Spoon won't, at least, kill you. Without such certification the Greasy would go out of business. Fewer greasy hamburgers sold. Not good.