Wednesday, July 16, 2008

Gun Shows and Market Failure

Since the VT shooting, firearms, public health, and emergency preparedness have become a serious and important issue for the State of Virginia (N.B.-I know, it's the "Commonwealth" of Virginia, but it's fun to irritate the redneck aristocracy 'round these parts). Measures in two important areas were considered: (1) reform of the mental health system, most of which ended up being a Criminal Justice-oriented compromise, but a net improvement in many cases (page 2, bottom; page 3, top); (2) stricter rules on background checks for the sale and purchase of firearms, which was killed ("Carried Over"; page 3, middle).

My focus, for the moment is on the Kill Bill on the measure attempting to close the "Gun Show Loophole" on criminal background checks. Basically, there are about a half-dozen loopholes at various state levels that circumvent the federal laws requiring background checks for people purchasing firearms. Admittedly, Cho, the shooter at VT, did not purchase his guns through any such loophole, but that does not mean the argument for closing the loophole is closed. Cho did get his bullets from one such "loophole dealer, which reminds me of this:

Chris Rock Bullet Controll

Anyway, both sides bring strong moral arguments to the table on the broader issue of gun control, so I will try to take a more market oriented approach. Suppose that we meet in a market and we exchange corn for shoes. Better yet, we meet and I buy corn from you for the "social contrivance" Paul Samuelson called money. There is nothing that you really need to know about the corn or that I need to know about how you intend to use it that affects my expected profit from selling the corn or has any externality on any third party. In jargony terms, there's no real market failure in the form of informational asymmetry, moral hazard, or externality.

Now consider a few examples of so-called market failures starting with the used car market. Georg Akerlof used this market to describe the market for "lemons." Basically, only sellers know for sure if their product is a lemon, and this informational asymmetry drives down the price that all sellers are able to obtain, thus crowding out "good" used cars, leaving only lemons. In this example there was some very important information that the seller had that the buyer did not, thus worsening the quality of the market. Similar models by Joseph Stiglitz and Michael Spence use information asymmetry to describe employers' efforts to screen "ability" and "effort" of their employees in labor markets.

We can also consider the auto insurance market. In this case, buyers are "adversely selected": only the buyer knows if he is a bad or reckless driver. The result? One result might be that it drives up the cost for users who are good and careful drivers, or good drivers are not insured (insured drivers are "adversely" selected). Alternatively, this type of market can have an equilibrium in which good drivers are not "overcharged," but they separate themselves from the "bad" drivers by choosing to "under-insure," and only "bad" drivers get full insurance. A similar argument has been applied to health care.

I think that in their best moments, advocates for stricter background checks are really just trying to address these simple market failures. Basically, the best way to protect the gun-ownership rights of honest, law-abiding citizens is to take steps to ensure that those who buy guns (be it at gun shows, estate auctions, or other "loopholes") are not "adversely selected" due to some informational asymmetry, because the potential harm to third-parties (externalities) are so immediate and severe. I

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