Econ 101: The merits of a market economy

The efficiency of a market-based allocation of goods is something taught very early on to students of economics. But once in a while it’s good to remind ourselves of it, especially since it sounds like propaganda in the ear of some. Ask yourself, in which bus shelter would you rather prefer to wait for the bus. The new and shiny one on the picture above where you’re exposed to the latest fashion advertising. Or the neutral one below?

Jean-Claude Decaux made a fortune 6.2 billion dollar fortune with proposing a simple deal to communities. His company installs brandnew bus shelters on the streets under the only condition that it can freely use the wall surfaces for advertising. What makes this deal so beneficial to society is that JCDecauy knows you prefer the shiny and new shelter over the ugly shack. And you’re much more inclined to react positively to the latest fashion ads when they’re presented in a nice environment. Also the advertising companies themselves know this fact and would kindly remind JCDecaux once they would become a little to lenient on the maintenance. Because incentives are aligned so well here everybody wins: the city mayors, the consumers of bus shelters, and Jean-Claude Decaux himself.

In principle, one could try to achieve the same allocation by a democratic decision process. Voters who, in economics lingo, have a positive willigness to pay for nicer bus shelters could pressure their local politicians to invest public funds. Politicians react accordingly, renew the stops, and we could avoid rising inequality because nobody would earn a billion personal fortune. But somehow this doesn’t work as smooth in practice. Most likely, the initiative to invest in public transport gets mingled with other more important questions in the next elections, and nobody wants to incur the personal costs of getting engaged politically. Suddenly, the city mayor is not accountable anymore for the ugly bus shelters and, consequently, has no incentive to invest.

This is a cherry-picked example, for sure. In many cases a free market does not nearly work as well. But an economist is trained to believe in the default state of an efficient market allocation. It holds until proven otherwise. In my opinion that’s a helpful dogma.