Tuesday, October 10, 2006

Carrot and Sticks

I read an Oddly Enough Reuters article a few weeks ago that the biggest complaint residents in Shanghai have about the city is the number of people walk around in pajamas. Funny, I would have listed the spitting or the shoving well above the pajamas, but that's just me. Anyhow, walking to work today I saw an old guy in pajamas and about a block later a street vendor selling packages of pajamas. It got me thinking about the U.S. illegal drug policy and how governments can most effectively affect markets.

Basically, I think governments can best influence markets by providing carrots to demand and sticks to supply. You can't really roll out a bunch of tanks and force people to stop wearing pajamas or using drugs. Well, maybe the Chinese governement can, but I digress. Instead, you can have a bunch of public service announcements extolling the virtues of not wearing pajamas or just saying no. At the same time, the government can crack down on pajama stores and drug dealers. In this case, demand is dispursed while supply is concentrated. Sticks seem to be less effective on dispursed entities than concentrated ones and carrots to concentrated entities smacks of special interest groups and unfair rewards.

What about the cases where demand is centralized and supply dispursed? Is there something wrong with punishing a few people just because they want something government is trying to discourage? Are there effective ways to increase supply or do you just create markets without customers?

Thoughts? Comments?

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