Eric Rasmusen’s Weblog

Consider the old joke about the farmer who, having noticed that watermelons were disappearing from his garden, posted a sign saying,

“One of the watermelons in this garden is poisoned.”

The next day at dawn he looked out and saw that no more watermelons had been taken but the “One” on the sign had been crossed out. Now the sign said,

TWO of the watermelons in this garden is poisoned.”

I think this tells us something about freedom. The watermelon problem is that each person knows that if he eats a watermelon he might die. Just one watermelon being poisoned wrecks the value of the whole watermelon patch. Are regulations the same?

Laws prohibiting acts malum in se are not hard to obey. You just have to know good from evil. Laws prohibiting other acts (malum prohibitum) are harder to obey. You need to find out what is banned, first. Second, you need to find out the penalty. You can make a good guess at the relative penalties for theft and murder, by weighing the moral wrongs. But it is harder to guess at the penalty for holding more than 5% of a company’s stock without notifying the SEC.

I wonder if I can model this using inconsistent diverse beliefs. There would, it seems, be a whole distribution of guesses by different people as to the penalty for violating a regulation. Suppose there are N actions a grocery store might take, and 1 of them is banned, but nobody knows which. People differ in their best guesses about the penalty from a $10 fine to a million dollar fine. They have a choice: avoid all N actions, or doing them and accepting the penalty or finding out which one is prohibited. What is the difference in moving from 1 to 2 actions being illegal? Smaller than in moving from 0 to 1, I think, for two reasons. First, people with high penalty beliefs will shut down their store even if just 1 action is illegal. Second, more people will find out what is illegal, because that has a big fixed cost component.

I should put a discussion of freedom in the Government Failure part of my social regulation book.

This entry was posted on Monday, January 29th, 2007 at 12:34 pm and is filed under Social Reg. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.