Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't

addition, real estate agents know better than most people what improvements will boost a house’s value. While they do make these suggestions to their clients,49 realtors are more likely than their clients to take their own advice.
Finally, the cost for a real estate agent to sell her own home is probably significantly less than the cost of selling a client’s home simply because the realtor knows her own schedule. The agent does not have to coordinate with the seller on things like the timing of showing the house.
Similar advantages accrue in any profession with specialized knowledge; it’s not an indication that clients are being cheated. Don’t we expect doctors to obtain the top medical treatment for themselves simply because they know who the best doctors are and are better able to evaluate the medical advice they receive? Does this mean that patients who are not doctors are being treated unfairly?
Sellers of houses enjoy a competitive market among realtors. Realtors must compete against each other for clients based on their reputations, commission levels, and their recommended selling price for a given house. Sellers also have the option of selling the house themselves, without an agent. In short, home owners who sell through a realtor do so because this allows them to get the best price for their house.
LoJack: A Weak Product in an Efficient Market
Some academics cite the poor sales of LoJack, a vehicle anti-theft device, as a textbook case of market failure.50 LoJack is indeed an interesting idea—it’s a small tracking device a manufacturer can hide in a car. If the car is stolen, the police can use the device to emit a radio signal that allows them to find the car. LoJack would seem to have an overall societal benefit—since criminals won’t know which cars are protected, even cars without LoJack should benefit.51
But, as the argument goes, this creates a problem: you don’t install the devices on your car, but hope other car owners will. That way, if auto thieves don’t know which cars are protected, you benefit from the overall drop in car theft stemming from the presence of LoJack on some cars, while only other car owners bear the cost of installing the device. So in the end, no one installs it, because everyone hopes that everyone else will do it.
Is this a case of market failure? Not quite. If these devices worked, this problem would solve itself. For example, if only Porsche installed LoJacks on its cars, car thieves would learn to stay away specifically from Porsches, and thus only Porsche would reap the benefits of the device. The incentive, in fact, would be even stronger; thieves would pass up Porsches for other cars, meaning thefts of cars without LoJack would likely increase as thefts of Porsches declined. Rather than having too little of an incentive to install LoJacks, any single company would have too much of an incentive to do so.
So if the market is working properly, why aren’t car manufacturers installing LoJack? The clear answer is that LoJack’s benefits are greatly exaggerated. Most auto insurance companies give “no discount for LoJack except in states where discounts are mandated.”52 Amy Kelly, a sales agent with GEICO insurance, points out that the device doesn’t effectively deter theft because by the time a stolen, LoJack-protect car would be found, “it would [already] be wrecked.”53 Moreover, academic research was unable to confirm the benefits originally claimed for the device.54 With $8.4 billion worth of cars stolen in 2002, car companies would love to have access to an effective anti-theft device. Reducing the rate of theft would make any car model very attractive to consumers by lowering insurance premiums and giving buyers confidence that their cars won’t be stolen. In this case, the market works but the product doesn’t.
Court Regulation: Good Intentions, Bad Results
Anti-corporate hostility can be especially damaging when it’s embraced by judges. If accused of wrongdoing, companies, like individuals, are entitled to a fair hearing in court. When such cases entail a lone individual squaring off against a company or corporation, judges are responsible for evaluating the competing claims and rendering an impartial judgment based on the evidence. As we will see from the following examples, however, judges can become overly-sympathetic to individual plaintiffs, especially the poor, the sick, or those suffering from other difficult circumstances.
It’s human nature to want such plaintiffs to win their cases—who could possibly hope to see a “greedy” corporation with high-priced lawyers emerge victorious over a poor single mother or a critically ill patient? But in allowing their hearts instead of the law to decide such cases, judges fail to consider the larger economic consequences of their judgments. And these trends, ironically, often are most harmful to the poor, the weak, and the ill—in other words, the exact kind of people the judges are seeking to help. By assisting one individual, justices inadvertently harm a much larger number of people.
Take a well-publicized case from Washington, D.C.55 A mother on welfare wanted to buy a $514 stereo system on credit from a store that had previously sold her such items as a bed, a washing machine, and four kitchen chairs. The store agreed to sell her the stereo but asked her to grant a lien on her previous purchases—if she proved unable to pay off the stereo, she would have to give the items back to the store. When the mother defaulted, the company turned to the courts to enforce its contract. The courts initially ruled in favor of the company, but on appeal a D.C. Circuit Court found it “unconscionable” that “with full knowledge that appellant had to feed, clothe and support both herself and seven children on [just her welfare payments], appellee sold her a $514 stereo set.” The court thus invalidated the contract.
The ruling clearly assisted the woman by allowing her to keep her previous items. And the judges probably felt good after helping a poor woman take on a richer, more powerful company.