Could You Get It If You Were Rich?

One common complaint about markets is that profit-maximization leads to low-quality products. The populist version is just, “They cut corners to save money.” But the populist version doesn’t explain why firms don’t offer a full menu of price-quality combinations. Firms could just offer “copper,” “silver,” “gold,” and “platinum” quality levels, with suitable upcharges for each quality tier.

Textbook asymmetric information models have a response. Namely: While sellers know what quality level they’re producing, customers can’t easily tell. So while they might be happy to pay $500 extra for a product that costs $400 extra to produce, unregulated businesses will try to take advantage of their cluelessness. How? By saying “We spent the extra $400” even though they didn’t. In asymmetric information models, customers are aware of these incentives, so when firms insist “We spent the extra $400,” customers sarcastically respond, “Sure you did.” The end result is that only the lowest quality products get produced.

To be fair, some of the earliest asymmetric information papers admitted that reputation and warranties could be viable free-market solutions to this problem. In practice, however, mainstream economists have long lazily used these models to justify sweeping regulation of product quality to “protect consumers.” While they know the populist “They cut corners to save money” accusation is deeply confused, they still endorse policies inspired by the populist complaint.

A key feature of both populist and textbook complaints: They directly contradict the adage, “You get what you pay for.” Instead, they are stories of market failure, where firms fail to provide high-quality products despite ample consumer demand.

Which raises one big question: Do you really think that the rich cannot get high-quality products? Or to put it more personally: For any given product, could you get it if you were rich?

The question sounds obtuse. Not only can the rich get high-quality products; they obviously do get high-quality products. But if that’s so obvious, not only is the populist complaint totally wrong. The textbook complaint is deeply wrong, too. If rich consumers don’t need government help to get high-quality products, then all the government is protecting ordinary consumers from is the opportunity to save money by sacrificing quality.

Government quality regulations are normally strictest for safety and loosest for sheer luxury and convenience. So we can modify my question to reinforce the point: Do you really think that the rich cannot get all the luxury and convenience they’re willing to pay for? No? Then what’s the point of the strict safety regulation? Markets will happily provide all the safety people are willing to pay for.

In slogan form: “Consumers, not firms, cut corners.”

Does this argument prove too much? For example, does it show that externality problems are somehow fake? Not at all. Consider air pollution. Yes, a superrich person could enjoy clear air by living in the middle of nowhere. But if a rich person is in Los Angeles or Mexico City or Cairo, they still have to breathe the same dirty air as the poor. The same goes for crime: While the rich can pay extra to live in a safe neighborhood, they cannot visit a bad neighborhood and count on their riches to protect them. In fact, their wealth probably puts them at greater risk of being victimized in a high-crime area, because they’re such a tempting target. Try parking a Ferrari in Oakland, California.

“Could you get it if you were rich?” This question is an elegant way to tell the difference between phony and genuine market failures. If you can fix a problem by throwing some of your money at it, the market is working. If many or most people with this option refuse to exercise this option, the problem isn’t the market. It’s scarcity: They’d rather live with the problem and save their money to spend on something else.