Some Thoughts Concerning Regulation

The moral hazard (Defined as precautions that are not taken because if there is an adverse consequence some other party will pay for the damages) in Moscow is very similar to that of the New London case. If the city of New London is allowed to confiscate the property because "economic revitalization" qualifies as eminent domain then I can foretell many development agencies lobbying zoning commissions and city officials screaming that their proposed development has economic benefits for the city justifying such private property seizure. Because the property will be taken and given to the developers at less than market prices, costs of development will not be internalized and more "strip malls" than would otherwise appear in response to the market will spring up. It is going to cause inflation to go through the roof, but I guess the planning commissions understand the economic consequences of the decisions they make. I am not on any payroll so I can not be fined if my predictions turn out to be wrong.

Cafe Hayek argues that the property development falls under this over devlopment because the developers do not have to pay what the market is asking of them (the price the four people would be willing to take to move) otherwise there would not be the issue at hand. Thus the developers do not internalize the costs of their developments. I tend to agree. The market is being broken down and artificial prices are bing set. These prices do not represent the true costs of doing bushiness and as a result the proposed benefits are not accurate because they do not represent these costs.

There is another problem present however, the mayor of Moscow and the city officials for New London have created an artificial prisoner's dilemma. Let me clarify, each party, the meteorologist and the farmers or the developers and potential home owners depend on cooperation to maximize their individual benefits by gaining what they are in the market for, money, houses, and accurate weather prediction. In a market situation there are incentives for them to cooperate fully, each party had something to gain from the services of the other. And with these incentives the services and goods are provided.

However because of the rule created by the Mayor and the potential rule created by the Supremes, cooperation is no longer efficient. If a home owner buys their home it could potentially be seized and they will be compensated at less then market value. The homeowners represent the prisoner that did not confess while his cohort did and hence got the worst out come. It is the same with the meteorologist, it they cooperate they will be stuck with an outcome that is inefficient for them. As a result the markets in these arenas will fall apart because there is no incentive to cooperate. Each side will cooperate in the first round but every subsequent round, because of the incentives of the various parties to not cooperarte and hold out to gain at the expense of the other, nobody will cooperate unless there was cooperation in the previous round. (When I say cooperation I mean home owners buying homes at market prices and meteorologist providing their services at market prices.) No goods will be provided and these markets will fall apart. I thought we would have learned our lessons in Russia and their similar practices that resulted in less then stellar economies.