however, the second firm’s battery lasts 18 percent longer on average. If con-
sumers possessed perfectinformation about the batteries, the second battery
brand could well be the better seller because it delivers more power per penny.
However, only a minority of consumers (perhaps diligent readers of Consumer
Reports) are knowledgeable about the lives of different brands of batteries. Most
consumers decide mainly on initial purchase price. Thus, in the presence of
imperfect information, a free competitive market will have no way to rid itself
of the less-efficient product.
Much more serious examples of market failures occur in the realm of prod-
uct safety. For instance, consider a hypothetical (or perhaps not so hypotheti-
cal) children’s toy, a miniature missile launcher. Let’s say the toy already is
popular in Europe, where it was first marketed. The European experience sug-
gests that the rocket has produced a large number of serious injuries and even
near fatalities. In such a case, the prudent regulatory response may be to ban
the product in the United States altogether.
When consumers possess imperfect information or misinformation, market
outcomes typically will fail the efficiency test. Consequently, there is a potential
role for the government. Government regulators, with superior information,
may be able to mandate better outcomes than would occur in an unregulated
market. Under this rationale, the government bans some drugs, taxes alcohol
and cigarettes, mandates compulsory education up to a certain grade, and pro-
hibits the sale of unsafe products. Government can also act by requiring pro-
ducers to provide certain types of information, such as nutritional labeling on
foods or warning labels on cigarettes and wine. Recently, regulations have
required restaurants in Los Angeles and New York City to post letter grades
reflecting their inspection results in their front windows. The impact has been
strongly positive. Restaurant operators have redoubled their efforts to raise
cleanliness and food-safety standards.
At the same time, government regulation is not always an ideal remedy.
Frequently, the choice is between imperfect markets and imperfect regulation
or, sometimes, between market failure and regulatory failure. For instance, the
automobile is probably the single most regulated product today. Regulations
govern general performance, reliability, safety, fuel economy, and emissions.
The majority of these regulations represent improvements over what would be
offered in an unregulated market. But almost all these regulations are costly,
and not all constitute unambiguous improvements. Later in this chapter, we
will pay special attention to how the discipline of benefit-cost analysis can be
used to evaluate when and how to regulate for maximum advantage.468 Chapter 11 Regulation, Public Goods, and Benefit-Cost AnalysisBusiness Behavior:
Assessing RisksThe modern world is full of more and more things to worry about: global
warming, earthquakes, asbestos in buildings, hazardous chemicals, toxins in
fish, just to name a few. In making informed decisions—whether to choose air
bags on a new car, use lawn pesticides, or go skiing—consumers must grapplec11RegulationPublicGoodsandBenefitCostAnalysis.qxd 9/30/11 10:32 AM Page 468