Asymmetrical Information

My econ classes were too long ago, so I can reasonably plead ignorance, but I don't see how this qualifies as a market failure. Implicit in the calculation of a homeowner buying a home is the nature and quality of the neighborhood and the potential future prospects. How is a person deciding to rebuild based on those same calculations a market failure? It seems to me that this person is weighing the options on rebuilding in N.O. against doing so elsewhere, either within N.O. or in another location. Either way, she is maximizing her utility.

It seems to me, that whether the issue is urban pioneering or hurricane rebuilding, there will be those who vaulue rebuilding and living in the city more than others, and those people will choose to rebuild somewhere in N.O. Others will value price stability and resale more, and will choose to build elsewhere. The only input government should have is to be sure the real estate is freely transferable for value, so that each buyer and seller can maximize their utilities. Other than that, it should get out of the way. Subsidizing, or worse, undertaking the rebuilding, will simply distort the market.

Jane - "flood plain" understates the problem. the land is below sea level; flood plains are alongside big rivers that are prone to spilling over their banks. After spilling their banks, the water drains naturally, resulting in great, fertile farmland. Parts of NO must have stagnant flood water pumped out.

It seems that a more honest assessment of the situation could be done, and the shrunk population could live in closer proximity in the higher elevation sections of the city. The army corps of engineers could devise a new, more defensible system of dikes/levees/pumps for the city.

I'm not positive, but I don't think New Orleans homeowners were operating in a free market to begin with. I've read that if homeowners had to pay the true market cost for flood insurance, few homes in the below-sea level areas could be mortgaged.

Perhaps the cheapest long-term government solution would be to condemn all New Orleans residential land 3 or more feet below sea level and convert it to recreational and industrial parks. The Libertarian in me wishes that choice could be left to the landowners themselves. But I don't want to be paying for the next New Orleans disaster in 10 or 15 years.

Market failure: when the market does something I don't like.
In this case, when it doesn't make things exactly like they were before the flooding. The author seems to think that if the market doesn't shower a problem with pixie dust that's a failure. It looks to me like the market is doing just what is supposed to be doing--- making people wonder whether this whole city-under-the-sea thing is such a great idea.

If people don't want to come back, and I don't see why a lot of them would (so they can enjoy the crappy economy and corrupt government until it floods again?) that's their call. If I were the underclass I'd stay the hell away.

Some sort of escrow would solve the problem in a freemarket manner. People who wanted to rebuild and could afford to do so could make some sort of contractual commitment to rebuild conditional on a certain number of others also making the commitment. If the threshold for the number of rebuilders is met then the rebuilding takes places, otherwise not.

In this type of system, no individual has to stick their neck out.

Also, government action will probably involve large-scale urban planning. And we know what a good idea that is.

I think Michael (no relation) had it right. The bugaboo in all this is that of course, "Something must be done!" But why, if people want to live where there are earthquakes, hurricanes, floods, or plagues of locusts, shouldn't they pay for the insurance costs? Why should we underwrite them? That is, beyond the enormous hotel tax every time my family or place of business sends me to one of these paradises. Everyone is afraid to bring this up, so instead people look at their shoes and mumble a lot about gosh, doing something to help, or better yet, getting the government to spend kajillions, to be recovered by taxes on our children or grandchildren, thank you, on some foolish project like building the same ill-considered city, again. I understand the desire not to hold people accountable, especially immediately after the carnage, and I can imagine some sort of voucher-like plan for families who lost their homes, but let's keep the gubmint out of the planning process. In fact, let's not have a planning process.

Just a minor point; if the government rebuilds, I don't know that it forces anyone to go back. (I mean, it can't compel someone to move there, can it?)

It does, however, provide an incentive, though this does not change the raw cost/benefit utility calculus itself relative to it being coercive.

This could be a Times Beach moment. Use the billions of Fed$ to buy out the homeowners at pre-flood market, and auction off the property to anyone who wants to try to develop it. (Yes, I know they didn't auction off Times Beach, but they should have.)

Is it essentially a problem of co-ordinating expectations?

I would expect a wide range of variation in preferences around this. Some die-hards would probably move back in the face of any disincentive that was less than certain death, some are presumably so traumatised that they've moved to Nepal just to get as high above sea level as possible.

So the die-hards start building. Those people who aren't quite die-hards but would love to move back to New Orleans as long as they're confident there will not be tumble weeds rolling down the deserted streets see the re-building and start their own. And the next lot who would like to move back as long as they're confident there will be a school and a hospital and shops and restaurants see the re-building, and move back, and then it works its way outwards.

There may be some loss from people who mildly preferred coming back but wound up building lives elsewhere why people were making up their minds, but who might have moved back if the government had intervened. But the whole game isn't dependent on everyone making their minds up at once.

It should be compared to a full-on coordination game. Imagine there is a tunnel from England to France that you can drive through. You are driving from England to France on your left-hand side of the road, and you encounter a driver coming the other way from France, driving on his right-hand side. Also imagine there is no established way of handling this conflict. Now both of you have a wonderful incentive to not be in a head-on collision, but if you don't have a way to communicate you face a massive problem in coordinating expectations.

If the market discourages people from doing something as dippy as rebuilding the flooded parts of New Orleans, I have a hard time thinking of the result as a failure.

Take the money and move to Texas, people. Let the mosquitos have their land back.

prof delong is being an ass and blaming it on the market. quel surprise!

ideally, the feds would expropriate all land less than 5 feet above sea level in the affected areas and convert it all into federal parks. the corrupt city of new orleans needed to be destroyed, the underclass needed more opportunity, and we needed to stop shoveling money into undefensible levees. this is a win all around.

the real market failure is the one that keeps delong employed as an economist. though he is at berkeley, home of mao love (seriously, last week there was a nice article rounding up students and residents upset at a book that mad mao look like a genocidal dicttator!)

So, market failure = people having to weigh risks and constraints when making big life decisions?

Look at the thought processes at work here: Thinking and planning is stressful, so the government should just do it all and "liberate" us from responsibility.

I really loved this quote: "But achieving this coordination in the circumstances of New Orleans seems impossible." Really? When I look out my window I see a world where the complexity of goods and services offered can only be achieved by the emergent forces of a price coordinated economy.

Since actual poverty is almost unknown in America now, liberals had to create a new bugbear called "risk". Good choice. Unlike actual human suffering, which can be overcome by political and economic freedom, risk will always be with us.

I think that neighborhoods like Chantilly will be, for the near future, like the General Development communities of Florida in the 70's and 80's. Streets with a house here or there, in good (i.e. rebuilt) condition, but with tons of vacant lots all around. When I lived near Port St. Lucie, I found some of those areas to be downright scary in that they seemed hardly patrollable or defensible, even in a bland suburban/retirement environment like PSL.

The companies that developed these communities finally recognized that, and set up a system where you could trade the lot you bought on TV in 1968 for a lot in a more developed part of the town where you weren't so isolated. Don't know how this could be done in NO, but it strikes me as a sensible way to reconcentrate the people that would like to return.

As far as collective action - can't we just collectively say no way?

Add me to the roll call. What exactly is the problem? And is it really such a great idea to try and put N.O. back the way it was before, anyway?

The main argument I hear goes that we are supposed to sproing an economically inviable New Orleans right on top of the wreckage site, and we are supposed to do it because of the cultural aspects. That's a theme park, not a habitation. Will admission be charged? Will the costumed actors pretending to live there get paid for their performances?

To the extent this really is a collective action/shared expectations problem, is there a relatively inexpensive way to use the Web to address it? For example, forums for people from various neighborhoods to coordinate, discuss plans, find out how many neighbors are serious about returning, etc. Is Craigslist or LJ already facilitating this? Or is it unfeasible for reasons I haven't noticed?

If I were Harry Shearer, I'd probably say that since ACE broke it, ACE should fix it. Click the link to find out what that means.

Markets don't fail because they don't have a purpose beyond themselves (i.e., providing its participants with a forum for trade).

Now, allowing markets to operate freely certainly has huge secondary and teritiary benefits for everyone in society beyond the immediate market participants, but the market cannot "fail" in the sense that it is designed and implemented by a single mastermind to achieve a specific purpose.

The whole concept of market failure presupposes an expectation that one can should be able to use other people's productive activity and trade for his or her own purposes.

In any event, the very idea that "everyone" will want to rebuild, but "no one" will, is silly. Name one area where economic activity of this sort is all-or-nothing.

Some will want to build, some won't. People have different needs, benefits, drawbacks, etc. Only someone as self-absorbed as DeLong and the LA Times would assume that "everyone" has the same preferences.

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