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Notes
- 1.
Absent transactions costs, markets are complete. Contracts could be written before the fact, for example, to insure against outcomes that diminish one’s life chances. While the standard of economic efficiency is frequently criticized for ignoring the welfare consequences of distribution, an economy with complete markets would also achieve equity in initial distributions.
- 2.
Sourceforpovertylevel:USCensusBureau.Povertythresholds2007.http://www.census.gov/hhes/www/poverty/threshld/thresh07.html. Accessed 2008 July 22.
- 3.
- 4.
Acemoglu (2003, p. 6) similarly observed that, while “Many studies on economic growth and the political economy of development have pointed out the costs of entry barriers … An even larger literature … focuses on the cost of redistribution.”
- 5.
Raghuram Rajan and Luigi Zingales (2003) offer an accessible and authoritative extension of this argument to the financial sector.
- 6.
Just as “monopoly” refers to a condition where economic power is concentrated in producers, “monopsony” refers to a condition where power is concentrated in buyers.
- 7.
Notice that, to the extent that price exceeds marginal cost, there exist consumers who are willing to purchase additional quantities of output for a slightly lower price (since the demand curve slopes downward) and producers who are willing to supply additional quantities (since the slightly lower price would still exceed the producers’ marginal cost). Absent frictions to the contrary, these mutually beneficial transactions will continue until the market price equals the marginal cost of production.
- 8.
An interesting but unresolved issue is whether this bidding process fully dissipates the benefits of gaining such legislative favors.
- 9.
Peltzman’s article builds on George Stigler’s (1971) pioneering work.
- 10.
To anticipate our future results, note that “society” encompasses competing interests. Nameless economic performance, as a consequence, tends to lack a special interest.
- 11.
This type of lobbying is known as “rent seeking”, and is socially undesirable not only for the deadweight losses that it directly creates (e.g., the economic opportunities that are lost from exercising market power, as illustrated by area C in Fig. 5.1), but also because producers and political agents must forego potentially more productive opportunities to seek redistributive benefits. Nobel laureate James Buchanan frequently receives credit for bringing these costs to light (e.g., see Mueller 1989, p. 230). Fred McChesney (1987) went even further, highlighting the potential for “political blackmail” to weaken economic performance. In his model, legislative agents not only benefit from creating rents for support constituencies, they also benefit from extracting pre-existing private rents. For example, agents may also accept campaign contributions in return for credible promises to forego taxes on accumulated investment.
- 12.
Notice that the marginal cost curve is flat in Fig. 5.1.
- 13.
- 14.
This type of normative inference exhibits considerable robustness to modeling assumptions. Economic performance, as evidenced in Part I of this book, appears inferior when evaluated not only in terms of deadweight losses, but also when compared to optimal outcomes in dynamic consistency and real option models. This agreement across intellectually reasonable approaches to antitrust questions suggests that something more than structural concerns for static regressive distributions is necessary to defend consumer surplus standards for competition policy (Falaschetti 2008).
- 15.
Note that changing the level of wealth from W1 (where the utility curve is relatively steep) causes a considerably larger change in wellbeing than does changing wealth from W3 (where the utility curve is relatively flat).
- 16.
Recall that our original “concave” curve relates wealth levels to actual, not expected, utility.
- 17.
United States District Court, S.D. Alabama, Southern Division. 2008 Indiana Jury Verdict Reporter.
- 18.
In a case like this, the market will consist of households that have a high probability of filing a claim. Recall from our Fig. 5.2 that insurance contracts are unlikely to be written for extremely high and low risks.
- 19.
Florida’s Office of Insurance Regulation (OIR), for example, is considering (as of this writing) a proposal “to ensure that rates or premiums associated with credit reports or scores are not unfairly discriminatory” (Coldny et al. 2008b).
- 20.
See, for example, Abraham (2002).
- 21.
Mierzwa v. Florida Windstorm Underwriting Association, 877 So.2d 774 (Fla. 4th DCA 2004).
- 22.
This example draws on personal experiences of the author in 2006, during his service as a senior economist for the President’s Council of Economic Advisers.
- 23.
Thomas Sowell (2007) developed an accessible review of this history.
- 24.
Tennyson (2007) reviewed the literature on these theoretical implications and supporting evidence. Despite this scientific backing to the contrary, however, regulatory officials continually describe such controls as “experiments” whose prospects for success are realistic. In doing so, they even take the logically inconsistent stance that stringent controls are necessary to achieve a “free market” (see, e.g., Bushouse 2007). To be sure, satisfying the institutional pre-conditions for markets to perform well is not trivial – but the careful inquiries reviewed here agree that common controls on the insurance sector have failed on this margin. This disconnect may speak less to the ignorance of associated political officials than to the unyielding nature of distributive pressures that fundamentally govern social choices.
- 25.
Tennyson (2007, p. 19) observed, for example, that “(r)egulations cannot eradicate the underlying incentive forces that govern decisions in markets, and regulations that ignore these forces lead to unintended consequences that worsen market outcomes.”
- 26.
In 1989, the sixth most costly hurricane, Hugo, struck the US mainland in Georgia and moved northward through South Carolina, North Carolina, and Virginia (Insurance Information Institute).
- 27.
New York is a close second, and Texas a distant third with less than 40 percent of either Florida’s or New York’s value (Insurance Information Institute).
- 28.
See, for example, Risk Management Solutions (2006).
- 29.
Citizens Property Insurance Corporation.
- 30.
Mr. Douglas observed that, “when we got storms in 2004–2005, people accustomed to paying a $600 premium faced a $2,000 premium and they went ballistic. But $600 wasn’t even close to a realistic rate” (Zucco 2008).
- 31.
Former Chairman Douglas also explained how insufficient premium revenue may have led to Citizens’ inadequate capacity to service claims (Zucco 2008). Winans (2008) reviewed the pattern of cross-subsidization that may ultimately see voters in low risk states rescuing undercapitalized public providers like Citizens.
- 32.
Florida, for example, provides such protections through the Florida Insurance Guaranty Association. Depositors, likewise, tend not to be careful monitors, since public deposit insurance provides a backstop for weaknesses that banks might encounter.
- 33.
“Relevant politicians” not only include the regulators themselves, but also those who nominate, approve, and oversee the regulators.
- 34.
- 35.
By Order No. 87822-06, for example, Florida’s Office of Insurance Regulation (OIR) approved a new assessment of 1.4% on premiums paid for all new policies and policy renewals through Citizens, starting December 15, 2008 (Colodny et al. 2008 (September 4)). And by statute, a catastrophic storm would allow this assessment to increase to 45 percent for customers of Citizens, while exposing those insured with companies other than Citizens (even those with auto insurance policies) to upwards of a six percent assessment (Garcia 2008a, c).
- 36.
In 2006, Florida offered $250 million in matching loans to encourage the development of a domestic market (Vogel 2008).
- 37.
Domestics tend to be less than ten years old (Vogel 2008).
- 38.
A qualitatively identical combination characterized the S&L industry before its catastrophe in the 1980s, and characterizes plan sponsors of defined benefit retirement plans today (see, for example, Falaschetti and Orlando (2008, Chapter 14)).
- 39.
This average is closer to that of the coldest state in the US (Maine, 40.6 degrees) than the hottest (Florida 71.6 degrees). Source: NOAA, http://climvis.ncdc.noaa.gov/cgi-bin/cag3/state-map-display.pl, accessed August 6, 2008.
- 40.
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Falaschetti, D. (2009). Law. In: Democratic Governance and Economic Performance. Studies in Public Choice, vol 14. Springer, New York, NY. https://doi.org/10.1007/978-0-387-78707-7_5
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