Published in El Pais, 23 March 2019.
Do you know if you are paying the right price for the product you buy? You might be if it is an easy to judge foodstuff, but for most of the products, most of us simply do not have the knowledge to tell. When you go to a doctor, you assume that he has the knowledge for a correct analysis. If your car breaks down and you bring it to a garage you assume that the mechanic is right when he tells the battery is bad. If your lawyer writes a memorial with all the legal terminology you trust him that knows what he is doing. In all the previously mentioned situations normal mortals, like you and me, have no way to check the quality of the work they are paying.
This phenomenon is called a market failure. In this case, one aspect is the information asymmetry. It means that one party has more information about the product than the other party; thus, it has an advantage setting the price. Information asymmetry is more common than you think. For example: a seller of a second-hand car probably has some information that he or she doesn’t want to tell fearing for a lower settlement. In other words, the price people paid for a product or service is much higher than they would have had if they would have known all the information.
To solve any market failure, we need the government. The government needs to make sure that the most oblivious party is protected by the law. Certification of professionals, warranties, return policies or even certain quality standards like done for biologically produced products. But what if the government is suffering of government failures?. In these cases, there are no laws, or there are laws poorly enforced. Consequently, any problem must be dealt with in a lawsuit. A lawsuit is an expensive and lengthy solution that is accessible to people who have economic and time possibility. The rest of the people would have to accept the loss and hope next time they are not cheated.
The economic burdens due to these asymmetries of information are often underestimated and are often not related to government failures. Markets are not perfect and cannot function properly without controls and help from the government. Recently, economists are really focusing on the relation between these two failures. So next time you feel your lack of knowledge got you a pig in the poke, it might be a market failure, but it is the government to blame.