Making Markets Work - Information Asymmetry

An article about health care in the 2012 November Wired offers a strong reminder of how important smart government policy plays in making markets function well.

In the early 1950s, it was nearly impossible to know the value of an automobile. They had prices, yes, but these would differ radically from dealer to dealer, the customer a pawn in the hands of the seller. This all changed in 1958, when US senator Mike Monroney of Oklahoma shepherded a bill through Congress requiring that official pricing information be glued to the window of every new automobile sold in the US. The “Monroney sticker,” as it came to be known, has been with us ever since. It became an effective means of disclosing the manufacturer’s suggested retail price, or MSRP, and a billboard for other data disclosures to the consumer: the car’s fuel economy, its environmental rating, and so on.

The sticker price was one of the triumphs of consumer-rights legislation and has made buying a car an easier—though never altogether easy—experience. What’s more, window stickers made automobile pricing rational and understandable. A customer who knows the base price going in will expect more value coming out. In economic terms, the sticker turned a failed market flummoxed by information asymmetry into something resembling a functioning, price-driven marketplace.

There are many smart government policies that could radically improve the telecommunications industry, collectively saving billions of dollars for Americans and businesses. Unfortunately, most of these policies have been ignored by Congress and the FCC, which have focused instead on the solutions put forth by the big cable and DSL companies to further their own narrow interests.