The topic of where can regulation help. The previous article provided precedence for what kinds of pieces of information needed to be monitored and why. I like how the lecturer was like, “Yeah, we all know the reasons why this Bitcoin shouldn’t be regulated but let me know you why maybe it should be”. I
Questions answered in this Post:
- What are some justifications for having regulation?
- How can it help lemons market?
- How can it help price fixing
When markets fail and produce bad outcomes, regulation can address the failure…
Lemons Market
This argument first of all looks at cryptocurrencies as markets. He brings up a few market failure examples. The first example is the lemons market. Support in the market for widgets, some widgets can be low quality and some can be high quality. High quality widgets cost more to make and consumers (should) like them much better. An efficient market would deliver mostly high quality. However, there are ways this can fail. If consumers can’t tell the high from the low, then consumers won’t know to pay extra and sellers won’t sell the high quality items. Thus the better widget won’t prevail. This leads to a scenario where consumers are unhappy and they’re only buying low quality widgets since they don’t know any better.
Now regulation can be added to mitigate this problem. There are three mechanisms given, required disclosures, quality standards, and required warranties. With regulations, some trusted party stamping what is high versus low, this can raise consumer confidence on what they are purchasing. In many cases, there is a secondary party who enforces good behavior and can put in place penalties for not keeping the standard. Thus, now when the seller sells a guaranteed high quality and the consumer is happy, this can allow the seller to make a premium for selling the superior product.
The lecturer also presents issues with just market-based approaches. Reputation which may not require regulations may take time to build up. Thus using just a reputation based system may not work. Warranties have similar problems as well. What is interesting is that many current tokens use things like token based reputation systems to allow for decentralization. The lecturer mentioned that just market based actions may not be sufficient so I’d be curious how these projects would respond to the arguments mentioned.
Price Fixing
The next part looks like price fixing. If all the sellers agree to raise prices, then consumers are at a disadvantage since they are forced to pay more. A similar issue is when different competitors choose not to compete and thus the consumers are forced to take whatever a seller’s price may be. Regulation with antitrust or competition helps to protect consumers.