Bryan Caplan  

Your Zip Code or Yourself

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Auto insurance regulations in California are going to change. At first glance, the changes look completely reasonable: Insurers will have to base rates on the driving records of the people insured. From the Daily News:

Moving to end years of wrangling over the "redlining" issue, state Insurance Commissioner John Garamendi said the new regulations will require insurers to look first at a driver's record - not the community of residence - when determining rates.

This seems like a regulation against burning money. Isn't it in insurers' best interest to base premiums on riskiness of the individuals insured? But the economics is far more complex, for at least two reasons.

  • The correlation between actual driving ability and driving record is far from perfect. There are a lot of bad drivers who get lucky and avoid accidents and tickets, and a lot of good drivers who get unlucky and have accidents and tickets. Using information about the riskiness of drivers in your zip code is a good way to compensate.

    Simple example: The typical 16-year-old male has a perfect driving record, but he's still probably a bad driver. There just hasn't been time to reveal it. Basing his premiums on his demographics rather than exclusively on his record makes perfect sense.

  • The expected cost of insuring a driver depends on a lot more than his driving ability. It also depends on the driving ability of the people who live near him, the value of their cars, the way the local courts work, and so on. A bad driver who lives in the middle of nowhere is unlikely to get into expensive accidents.

As usual, California regulators play the demagogue. They don't even bother asking "If this regulation is such a good idea, why aren't insurers already doing it?" Here's Commissioner Garamendi: "A good driver, wherever they are in the state of California, ought to have a lower rate than a bad driver, wherever that person is in the state of California."

If Garamendi were consistent, of course he'd decree that rates in California have to equal the national average. After all, shouldn't a good driver, wherever he is in the nation, have a lower rate than a bad driver? The average rate in California for 2004 was $2243; why not force it down to $1222, the average premium in North Carolina? I'd like to hear Garamendi's answer.

Well, actually, I wish I could read his answer on an exam, then give him the F he deserves.


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COMMENTS (37 to date)
James writes:

While I agree with the reductio towards the end of Bryan's post, I hope lawmakers at the national level (or more plausibly their aides) don't read econlog or we may just wind up with a law requiring insurance companies to offer the same rate to similar drivers regardless of their state of residence.

Daveg writes:

This look like a very politically explosive issue to me.

If the rates of all the people in the suburbs increase, I think their state congressmen and state senators will hear about it...

I can't belive he would wade into this can of worms...

T.R. Elliott writes:

The logic of your argument is totally confusing. First, I need to understand you basic position on insurance. Do you believe health insurance companies should use genetic testing in order to charge people higher premiums with a high probability of, for example, getting cancer? They can easily do it. A little genetic testing. A little analysis of the family. Is that how you think insurance should work? I don't. I believe risks should be averaged.

But even considering your particular arguments, they seem nonsensical. You mention lucky/unlucky drivers. Then say using zip code information somehow compensates for said luck/unluck. Zip code doesn't compensate. Within a particular zip code, there will still be lucky and unlucky drivers. Define why using a zip code is a good way to handle the luck. And your example of the 16 year old doesn't support it. You move from zip code, to years driving experience.

Essentially, you are mixing up geography, other demographic information, and driving experience and then consider yourself to be making an argument. You aren't. So the first bullet is meaningless.

Your second bullet. Justify your assertion. What are the odds of an accident for someone who lives in the middle of nowhere. And how do they compare with the odds in the city? Again, as with first bullet, you are just mangling together a bunch of parameters and then pretending to make an argument.

Then, your question about a regulation being something that companies would do: what nonsense is that? Do you not understand the point of regulations? You apparently don't. A regulation implies that the regulatory agency does not believe that the market is working to the common good. Now I understand completely that you will counter-argue that either (a) there is no such thing as a common good or (b) that unregulated markets lead to the common good or (c) regulators will create inefficient nonsensical regulations. But I know for a fact that you cannot prove (b). You can't. I do understand—having discussed issues like this with many libertarians (and I consider myself libertarian in many ways but I've got a greater respect for truth) that you will counterargue with some specious point about the soviet union and the US capitalism and "see, I rest my case" or some such nonsense. An Either/Or argument.

But that isn't an argument. Your question about "if this regulation is a good idea" is entirely rhetorical and adds nothing to the discussion.

The point of insurance is to average risk. You apparently don't understand that.

And finally, your final comment about national rates is fine but (a) the insurance commissioner of California has no say over rates in other states—are you saying that he does and (b) the insurance commissioner is setting the rates in California? I don't see that in the reference.

I'm going to say that the insurance commissioner is not dictating rates until I hear otherwise. Are you saying otherwise? All I see is that the insurance commissioner says risk should be averaged across the state and that driving record, which includes lack of record for young drivers—should be considered first.

So there. I've been chastised in another post for my ego and attitude. But I still consider this blog to be little more than ambulance chasing, looking for "proof" for the ideology of the authors. Not a search for truth.

Brad Hutchings writes:

Brian, Insurance here is California is so over-regulated that of course the insurance companies don't try to gain advantage by making better predictions of who will be more likely to have an accident and who will be less likely. About the only thing the industry ever could get behind was no-fault, which was a horrible idea.

Although auto insurance is mandatory in CA, there is an out... you can have a secured bond in a minimum amount. A very interesting and practical piece of academic work would be to determine who should go the secured bond route. Might it be less expensive for a good driver to move general savings or borrow money to secure that bond than to purchase auto insurance?

superdestroyer writes:

It seems to me that this is also a gimmick to force all drivers to assume the same risk from uninsured drivers instead of forcing those who live in areas with high numbers of illegal immigrants and poor people to pay for the additional risk.

Also, isn't the idea of location also related to the tendencies of juries to award damages and also related to the risk of a car being stolen?

It seems that the change is a ploy to move more insurance costs from poor, minority (read Democrat voter) drivers to affluent drivers (read Republicans).

T.R. Elliott writes:

Oh yeah, I forgot. I give the author of this post an incomplete. It's not worth an F. There isn't even an argument in it. Just a smattering of disconnected ideas.

So run off back home, do a little more work, and we'll take another look. And while doing so, please consider the following issues as well:

Should people across the street one another pay different rates simply because they have a different zip code?

Should the guy who lives in Rancho Sante Fe (my neighborhood) and drives his BMW 740 into downtown San Diego every day pay rates similar to the bloke who lives in downtown San Diego?

More generally, since you are against regulation, what is your approach to solving the problem of a person with a prexisting condition who loses his job and his insurance. In an unregulated market, who will want to pick up this person with a prexisting condition?

James writes:

Why expect the libertarian side to *prove* that unregulated markets lead to the common good? It would make far more sense to insist that regulations be proved to lead to the common good prior to implementation, given that perhaps neither markets not regulations will lead to the common good, but unregulated markets have the benefit of not forcing anyone to act in ways they don't want to.

What this regulation effectively says is that the insurance companies have to structure their pricing based only on those explanatory variables that the regulators find acceptable, regardless of what their actuaries determine to be statistically significant predictors of the likelihood of accidents. This forces the insurer to average risk across groups of drivers rather than averaging risk within groups. The consequence is higher costs to the drivers that are less likely to have an accident and lower costs to drivers that are more likely to have an accident. This does not strike me as leading to anything that could reasonably be called the common good.

T. R., I'm really amazed by the claim that you knwo for a fact that one cannot prove that markets lead to the common good. What is your definition of common good, and how do you know for a fact that this cannot be proven? Unless you have some perverse definition of common good (such as an idealized distribution of costs or wealth according to your own likes and dislikes) you have made a seminal insight into the field of welfare economics.

T.R. Elliott writes:

James: my point is that human society is a complex system. The argument often made by libertarians is that if there is a common good, it is best achieved by the so called invisible hand. That unregulated markets are the most efficient way to allocate resources. They cannot prove that. The assumptions that must be made to prove it have been demonstrated to not be true in practice. Every economist with even a grain of honesty will admit that.

So then we are left with the details. What to regulate. What not to regulate. Because on a theoretical level, one cannot demonstrate the optimality of regulation one way or another, it becomes a matter of deciding on a case by case basis, with due analysis.

The point of insurance is to distribute risk across a large population. Given the opportunity, insurance companies would love to (a) provide insurance to those who will not need it and (b) withhold insurance from those who will need it. It makes sense, similar to the way it makes sense for a farmer adjacent to the commons to sneak a few extra sheep onto it for grazing.

The insurance commissioner has instead decided that insurance costs should be averaged or pooled across the state.

These guys seem to provide a reasonable analysis of the issues in Los Angeles:
http://www.uctc.net/papers/654.pdf

Yes, per mile risks are higher in the inner city. Which means the BMW driving lawyer, who lives in the Palisades, should (a) pay more when he drives into the center of LA? or (b) less because he's in the less congested area?

I've got a better idea. Spread the risks across the entire state. Gee. What a concept. That's exactly what the insurnace commissioner is doing.

James writes:

T.R.,

I think I have some idea what you refer to regarding economists' assumptions. I'll admit that empirical research shows that people deviate from some models of rational behavior, that is, people make mistakes. However, even in environments where mistakes happen, this doesn't preclude the possibility that markets do more to lead to the common good than regulation. I find it quite a leap to reason from "people make mistakes" to "therefore other people should be allowed to interfere."

How is spreading risks across the state better? If my characteristics put me in a group that actuaries find to have a lower than average risk of getting into an accident, forcing me into the same risk pool as people with higher risk characteristics results in higher premiums for me with no similar increase in what I get from the insurer. Effectively, this regulation worsens my circumstances relative to what they could be. What is better about worsening someone's circumstances?

simon writes:

T.R. Elliot,

The purpose of insurance is to provide coverage for a low probability event whose cost is high.

Insurance companies are very good at pricing risk (and getting better). As Bryan noted, they have NO incentive to miss price risk. A miss priced risk opens the opportunity for competitors to take the business. Given the cost to acquire a customer is substantial and the breakeven time is typically a few years this would not be good business.

It is also worth noting that insurance companies pay on average 98 cents in claims for every dollar they take in premiums. Thus, as you increase risk you increase the pay out on average and thus push up the average everyone pays for insurance.

States like California and NJ that "protect" their drivers pay higher insurance rates than states where consumers are not as well protected. This should be a clue to you and others that the "protection" you allege is no such thing. It is fact at tax on STUPIDITY leveled on consumers of these states who blindly follow state regulators. The sad fact about this regulation is that it hurts everyone - consumer, insurance company, shareholder, humanity.

Robert Cote writes:

Like everything else in California auto insurance has been perverted into a wealth transfer scheme and liberal notions subsidy. Insurance companies can tell with statistical certainty how much they -should- charge customers but the municifent State prohibits such transactions precisely because they result in optimum outcomes. Deemphasising location is just the latest step in pandering to socialism.

Daniel writes:

Expanding on the second point - your ZIP code reveals things about other relevant risks, not just how good others are at driving. For instance, health care costs, and how likely others are to sue after an accident.

Robert Cote writes:

Understand that the 2000 Census revealed census blocks in Los Angeles that had 90%+ noncompliance with insurance, registration, drivers lisciencing or some combination thereof. Too bad the municifent State has decided that risk analysis is no longer allowed to determine insurance rates.

Zephyr writes:

Why is it that we accept price fixing by the state. Insurance price regulation is a remnant of the type of Central Planning and Control that has been abandoned by the champions of such -- the Communist nations. It leads to shortages and misallocation of resources.

Coverage rules and availability rules are good consumer protections that provide balance to the market. But price controls (rate regulation) is a disaster for everyone.

Robert Cote writes:

Why is it that we accept price fixing by the state?

This is Kalifornia. It isn't merely accepted it is EXPECTED. I know what the problem is and I can prove it. The issue is that the people who need to be convinced are unable to understand the proof. Catch 22. Kalifornia is so large that it collectively doesn't understand cause and effect. Beyond that we cannot distinguish correlation from association. Besides any attempt to rationalize auto insurance would lead to the necessity of enforcing rules that some people in power have decided not to apply.

Tom West writes:

Insurance companies can tell with statistical certainty how much they -should- charge customers but the municifent State prohibits such transactions precisely because they result in optimum outcomes.

Oh come on. If insurance companies *really* were that uber-knowledgable then why would we need insurance agents? Prices can vary by a factor of three or four between different companies for the identical case (and Lord help you if you don't have a good agent who's willing to optimize for insurance companies).

Why the differences? Well, according to the agents I've talked to: statistics heavily leavened with dartboards and executive whim.

This is not to say the statistical models are inaccurate, but anyone who believes that most business decisions are not two parts executive guesstimate to one part numbers hasn't actually worked with real businesses.

chilli writes:

Tom West,

Each insurance company develops its own model of risk. Subsequently, they provide different prices to the market for the different classes of drivers. Each model is optimized to a different sets of drivers within a book of business. There is no conspiracy.

Over the past several years companies have gotten better at understand the nature of risk associated with drivers by the use of risk models. The models are not perfect but easily beat dogma laden technocrats lording over the process.

There remains a role for oversight but it should not be driven by the assumption that companies are evil, consumers are stupid, subsidization of high risk behaviors, and regulators are omnipotent.

James writes:

Tom West,

Are you protesting insurance companies having differing price structures?

The old joke (or dogma for many) is that when prices are high, that's gouging and price manipulation. When prices are low, that's cutthroat competition and predatory dumping. When prices are the same, that indicates collusion and price fixing.

That always seemed incomplete, but it seems you've showed how to round it out: When prices are different, that indicates executives are using dartboards to make business decisions.

So there you have it. Any prices at all indicate that there is something wrong with the market that requires the passage of regulatory legislation.

bernard Yomtov writes:

Why expect the libertarian side to *prove* that unregulated markets lead to the common good?

Because they make that claim in every imaginable situation.

Are you saying that it is simply a matter of faith, without supporting evidence? If so, you are correct, but few libertarians are prepared to admit it.

James writes:

Bernard,
You write, "Because they [libertarians] make that claim [that unregulated markets lead to the common good] in every imaginable situation."

I'm not sure what to think about such a remark. If you actually believe that libertarians make such a claim about unregulated markets leading to the common good in every imaginable situation, even after reading the libertarian views on regulation expressed here and elsewhere, well, I'm shocked. Very few, if any, libertarians make such a claim, at least since the 1700s. In fact, very few libertarians even refer to such a thing as "the common good" when arguing against regulation. Rather, the common libertarian arguments against regulation are that:

1. Regulation involves the initiation of force against innocent people to prevent voluntary exchanges or mandate involuntary exchanges.
2. It would be a crime if any agent in society other than the state were to implement a regulation, so the reasons that justify forbidding others to implement the regulation should also apply when the state wants to implement it.
3. Regulation benefits some at the expense of others despite being dishonestly touted as a way to advance the common good.
4. Regulations create a set of incentives and constraints that bring about new problems which are often as bad or even worse than the problem the regulation was supposed to solve, and policy makers faced with the choice of repealing the initial regulation or implementing still more regulation will tend to choose the latter to deal with the new problems, causing the cycle to repeat.
5. Regulations, due to compliance costs, increase the fixed cost of entry into regulated industries which results in cartelization, ultimately hurting the parties that the regulation is supposed to protect.
6. Markets, while not perfectly allocatively efficient, cannot be made more efficient through regulation because the public good of ensuring that the state is only implementing good regulations, like any other public good, will be underproduced and bad regulation, like any other private good with negative externalities, will tend to be overproduced.
7. Politicians, concerned with getting (re)elected, will propose regulations that they expect will intimidate firms into making political donations in exchange for scrapping of the proposed regulation.

There are supporting arguments for all of these, both empirical and theoretical. I don't mention them here both for the sake of brevity and because my only purpose in listing them was to demonstrate the blatant falsity of your charge that libertarians claim that unregulated markets lead to the common good in every imaginable circumstance.

Regardless, I think you missed the point of my initial question. Either sellers can be presumed in need of regulation until proved innocent of such a charge, or they can be presumed not in need of regulation until proved guilty. Since bad regulations can generate consequences worse than the worst market failures but the best regulation cannot have consequences any better than the best markets, I find it wiser to err on the side of caution and presume innocence.

Robert writes:

There is a limit to the extent to which bad insurance regulation can go: if the system becomes so inefficient that the low-risk end of the insurance pool can self-insure for less than the regulated insurance industry can insure them, then if the low-risk population can identify itself and leave the system, the rates the industry must charge to the remaining participants must increase. At some point, this sets up positive feedback, and everything falls apart.

Bernard Yomtov writes:

James,

You cite a number of things that libertarians believe about regulation, some of which, if true, would lead one to conclude that regulation is almost always a bad idea. To me that means that libertarians believe the absence of regulation - hence "unregulated markets" - is beneficial to society, that is, it leads to the common good. To interpret your assertions otherwise requires playing some word games that don't interest me.

Now you claim that there are arguments in support of your propositions. No doubt there are. But there are also arguments against them. You cannot simply assert that those who hold to your views have no obligation to present supporting arguments, while those who disagree are under such an obligation.

And of course some of your propositions are meaningless, in that they establish nothing but are either faith-based(4,5,7), simply assume the libertarian conclusion(1,2,3), or are outright gobbledy-gook (#6).

As one example, consider your third point:

3. Regulation benefits some at the expense of others despite being dishonestly touted as a way to advance the common good.

Suppose I say,

"Free trade benefits some at the expense of others despite being dishonestly touted as a way to advance the common good."

Do you agree with this statement? If not, why not? If so, do you think we should increase restrictions on imports?

I urge you to re-examine your other points as well.

Bernard, writes:

Bernard,

I'm unsure what you mean by "word games." The term "common good" has a well understood meaning in the fields of normative and political philosophy, generally, conditions that are equally to everyone's advantage.

None of the arguments I list assume the libertarian conclusion. Nor are any based on faith (How would you even know such a psychological fact about me if it were true?) I am unfamiliar with the use of the term "gobbeldy-gook" as anything other than a pejorative, so I can't respond to your charge about 6.

I would be happy to provide justification for any or all of these arguments, provided that you first tell me what your standard of proof consists of.

I like your question about 3. If anyone says that free trade promotes the common good, they are making some new argument. The libertarian argument is that free trade benefits those who engage in it. If you know of any libertarians that claim that free trade promotes the common good, I'd love to see a source.

That poor arguments for free trade exist only tells us that poor arguments for free trade exist. Since I think buying and selling should be legal by default and criminalized only after the buyers and sellers are proved guilty of something, my position on free trade should be easy enough to infer.

Bernard Yomtov writes:

James,

We are perhaps talking past each other. You refer to a well-understood and well-defined meaning of the term "common good." Fine.

I did not intend the term in this technical sense, but rather more vaguely to mean "generally beneficial." In that sense my point about free trade was to show that policies can be generally beneficial while being costly to some group. Regulations sometimes fall into that category. My fault for misunderstanding, I suppose, but I don't feel too bad about it.

To be more precise, I think that libertarians do take the position that economic regulation is virtually always a bad idea, in that leaving economic activity unregulated leads to better results overall than the regulation.

I do not think that this is valid. I agree with T.R. Elliott that human society, including economic activity, is complex. I think that following simple ideologies, whether libertarian, Marxist, or other, in an attempt to generate universal rules about how the economy should operate is foolish.

To clarify what I mean by "assuming the libertarian conclusion," consider your first proposition:

1. Regulation involves the initiation of force against innocent people to prevent voluntary exchanges or mandate involuntary exchanges.

Often true, but so what? Apparently you regard interference with exchanges as automatically bad. I disagree.

I see nothing wrong with environmental regulation, for example, that in some cases forces people or companies to buy things they would rather not buy. I see nothing wrong with mandatory liability insurance for drivers. I see nothing wrong with zoning rules that keep someone from opening a paper factory in a residential neighborhood. In other words, I do not accept that forcing people into "involuntary transactions" or preventing voluntary ones is automatically a bad idea.

As for "faith-based:"

4. Regulations create a set of incentives and constraints that bring about new problems which are often as bad or even worse than the problem the regulation was supposed to solve, and policy makers faced with the choice of repealing the initial regulation or implementing still more regulation will tend to choose the latter to deal with the new problems, causing the cycle to repeat.

This begs the question. Regulation undoubtedly often changes incentives and constraints, though you make no case as to why these new conditions are necessarily worse as a matter of principle. I'm sure you can cite examples of regulations that had bad consequences. I can probably do it myself. That is not proof of a broader proposition.

James writes:

Bernard,

Regarding you claim that society is complex, I agree. Regarding your ultimate concludion from this that generating general universal rules about how the economy chould operate is foolish, I fail to wee the warrant in this inference.

Re: "Apparently you regard interference with exchanges as automatically bad."

Not really. For example, disrupting involuntary exchanges like a protection racket, or transactions by parties who are not innocent, like the sale of stolen goods are things most libertarians approve of. What libertarians regard as always and everywhere bad is the initiation of force against innocent people.

The YMCA is faith-based. None of the arguments I present are faith-based. I don't see how you've shown that my #4 is faith-based, unless you mean "faith-based" in some pejorative sense. Argument 4 is based on historical evidence the you seem to acknowledge. Your objection to it seem to be based on biases revealed in the way you evaluate the argument.

I write, "Regulations create a set of incentives and constraints that bring about new problems which are often as bad or even worse than the problem the regulation was supposed to solve..."

You write, "...you make no case as to why these new conditions are necessarily worse as a matter of principle."

In case the mismatch isn't obvious, this argument doesn't claim that regulation necessarily has worse effects than the problems it addresses, only that it often has such effects. The insurance industry is a perfect example. Years of well meaning regulation have resulted in increasing costs to insurers and rising premiums. Rather than do away with the regulations that caused these new problems, politicians have decided to apply more regulation to the situation.

Bernard Yomtov writes:

James,

You are being evasive and not addressing the issues here. It is very clear that when I wrote that you regard interference with exchanges as bad that I was talking about government blocking voluntary exchanges or forcing involutary ones. I cited some examples of cases where I consider this appropriate behavior by government, none of which you address, choosing to go off on a discussion of criminal activity instead.

You regard the use of force against innocent people as undesirable, but that is not at issue. The issue is what sorts of behavior the government may induce by the threat of force. Potential bank robbers who are deterred by the threat of force are innocent, kept that way by the threat. Closer to home, I make my mortgage payment every month because if I don't the government will use force to take my house away. Surely these are legitimate threats, and they are directed against people who have done nothing wrong.

The other example is equally unpersuasive. It is a major libertarian argument that regulations sometimes turn out badly? Who disagrees with that? Of course they do. That is why it is necessary to evaluate them on an individual basis, rather than by invoking ill-considered general principles.

James writes:

Bernard,

I'm certainly not trying to be evasive. In this thread we've both mentioned more topics than we could reasonably pursue here, and consequently departed from some. I wouldn't say that this means either of us is being evasive.

You are corrct to generalize that libertarians oppose regulation more often than not. However, this is a libertarian conclusion, not a starting assumption or an argument. If I were to argue that "Regulation is bad, therefore regulation is bad," I'd sympathize with characterization of the libertarian view as "automatic."

I'm fully aware of the fact that you like what you believe to be the expected consequences of various types of regulation. I like many of them too. As it happens, I'm not a strict consequentialist; I don't believe that outcome determines rightness of process. But if I did, I'd have to weigh this against the expected consequences of having a potentially corrupted institution in society vested with the power of disrupting market transactions en masse. You and I, having differing assessments of the probability and desirability of different possible end states, would disagree about what side of the tradeoff to be on. Then what?

Regarding your mortgage and force, I would assume that you have entered into a voluntary agreement to deliver a given sum of money to your housing lender. So your lender has a rightful claim to that sum of money each month. If you fail to deliver on that agreement, you are initiating force against your lender. Re: potential bank robbers, I've said nothing to give you the indication that I oppose threats for the purpose detering the initiation of force. If you want to find a counterexample to a general principle, it has to conform to the sufficient conditions of the principle and still be somehow recalcitrant to the implications of the principle. For example, if I say all primes are odd, you could cite the number two as a counterexample since it satisfies the condition of primality but is not odd. If I say I oppose all initiations of force against the innocent, a counterexample would be a case where force is initiated (not threatened or issued in retaliation to a prior initiation of force) against an innocent where I oppose such behavior.

Re: general principles and evaluating regulations on an individual basis, I fail to see how "That is why it is necessary to evaluate them on an individual basis, rather than by invoking ill-considered general principles," follows from "It is a major libertarian argument that regulations sometimes turn out badly? Who disagrees with that? Of course they do." And, not that I don't prefer well considered general principles, why would you care if they are ill-considered? It seems like you are sneaking in a general principle (that ill-considered general principles are no good) here, rather than evaluating each general principle on an individual basis.

Also, such an individual basis evaluation of regukations as you suggest would require additional premises, especially some normative premise such as "enact those regulations that advance the common good" or "do not enact regulations that attenuate the property rights of individuals," etc in order to generate a conclusion for or against actually implementing the individual regulation. Applying such a premise consistently is to make a general principle out of it. Applying a normative premise inconsistently would amount to, well...

bernard Yomtov writes:

I'm certainly not trying to be evasive.

You are doing an awfully good job for someone who is not trying. You have yet to respond to my comments about your very first argument. When you do I'll discuss things with you further. Meanwhile, enjoy your game, if you can find someone else to play it with.

James writes:

Bernard,

Exposing the inconsistencies and inconclusiveness arising from your dislike for the application of general principles is not a game. Some mutually shared method of deciding which claims warrant belief is a precondition of addressing your remarks in any manner more substantive than to call them faith-based games of gobbeldy-gook. But I'm not one for throwing around pejoratives in lieu of addressing other people's arguments.

Jon writes:

A reasonable compromise would be to charge people based on the population density of the zipcode.

The difficulty is that economically the difference between charging someone more for an item and slapping them with a fine is non-existent. The insurance and credit markets fine people not for what they did, but the probability of them doing something. Most people would find it reasonable to charge someone more because they chose to live in a high population density area; they would not find it reasonable to charge people more because they could not afford to move away from a poor area.


BTW: The claim that one of means can circumvent the law by posting "bond" does not fly. If you have the financial means to post the bond, you have much more than the bond at risk and will want the insurance!

Anonymous writes:


BTW: The claim that one of means can circumvent the law by posting "bond" does not fly. If you have the financial means to post the bond, you have much more than the bond at risk and will want the insurance!

You are not addressing the suggestion that was made: namely, posting bond with borrowed money.

Bob writes:

Bernard,

I've enjoyed your posts on this blog because counter-views are necessary for intellectual honesty. But go back and re-read James' #6, what you term "gobbledy-gook." Think about it in plain english - regulation potentially produces bad outcomes because a regulatory body has its own bias, myopia, and set of perverse incentives. If you can't accept this as possible, I'll have to chalk it up to your *faith* in human nature.

nmg writes:

what is your approach to solving the problem of a person with a prexisting condition who loses his job and his insurance. In an unregulated market, who will want to pick up this person with a prexisting condition?

Surely you aren't this dense?

In an unregulated market he wouldn't lose his insurance due to a job loss in the first place! The fact that one's medical coverage is tied to employment is a result of regulation.

jeez.

nmg

bernard Yomtov writes:

Bob,

Here is James' #6:

6. Markets, while not perfectly allocatively efficient, cannot be made more efficient through regulation because the public good of ensuring that the state is only implementing good regulations, like any other public good, will be underproduced and bad regulation, like any other private good with negative externalities, will tend to be overproduced.

What can this mean? Your interpretation is:

regulation potentially produces bad outcomes because a regulatory body has its own bias, myopia, and set of perverse incentives.

This is common sense, and no one should disagree with it. Regulations sometimes produce bad results. But that is not what James said. He claims that regulations never produce good results, can never improve efficiency.

And what is his reason? Not that the rule-makers have their own agendas that sometimes lead to bad rules. Rather he uses economic terminology, "public goods," "externalities," in referring to things that are not economic goods at all. Why? I don't know. But it obscures rather than clarifies. Ultimately what #6 says is that regulations can never do any good. James is entitled to believe that, but that doesn't mean his alleged logic demonstrates it.

You ask me to think about it in plain English. Perhaps you should ask James to write it in plain English.

Bernard Yomtov writes:

But I'm not one for throwing around pejoratives in lieu of addressing other people's arguments.

No. You prefer other ways to avoid addressing other people's arguments.

James writes:

Ensuring that the state only implement good regulations most certainly is an economic good. The characteristic that defines an economic good is that it is available in some quantity too small to satisfy the desires of all those who would gain utility from it. The service of ensuring that the state only implements good regulations absolutely is not available in sufficient quantity to satisfy those who want this service to be performed.

It is also a public good. The two characteristics of a public good are that it be nonrivalrous and nonexcludeable. Ensuring that the state only implement good regulations is nonrivalrous, in that if anyone uses their resources to ensure that the state only implements good regulation, everyone benefits. It's nonexcludable in that the people who do not contribute to their resources toward ensuring that the state only enacts good regulation still enjoy the benefits from the provision of this service.

That bad regulation is a private good is demonstrated by the fact that there are people willing to pay to ensure that bad regulation is implemented. That bad regulations have negative externalities is tautologically true in that the negative externalities are what makes them bad.

Since there is apparently some confusion regarding what constitutes an externality, it is when the costs or benefits associated with some allocative decision accrue to some party other than whoever made that decision. Since the costs of bad regulation do not fall entirely on the parties responsible for the implementation of bad regulation, there are negative externalities associated with bad regulation.

Jason Wilson writes:

Sorry to reply to this threat so late, and I doubt anyone is even still reading it but I just got back from my Christmas vacation and have been catching up on the blog. Here is what I have issue with:

If Garamendi were consistent, of course he'd decree that rates in California have to equal the national average. After all, shouldn't a good driver, wherever he is in the nation, have a lower rate than a bad driver? The average rate in California for 2004 was $2243; why not force it down to $1222, the average premium in North Carolina? I'd like to hear Garamendi's answer.

Well, actually, I wish I could read his answer on an exam, then give him the F he deserves.

I am sure if he took an exam he would explain the concept of Ceteris Paribus and go on to explain that a license in one state is different that a license in another state. I don't know the specifics of California and North Carolina but I know that the two states I have lived in (Nevada and Virginia) have completely different licenses. In Nevada a license takes 8 years to expire and Virginia it takes 5 years. That gives people in Nevada an extra 3 years of deteriorating health or other factors that might negatively affect their driving before having to report on it. And so on.

Apples and Oranges.

Cheers,
Jason

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