The economics of consumer protection: Introduction (original) (raw)

2000, Australian Economic Papers

This issue of Australian Economic Papers is devoted to the economics of consumer protection. Consumer protection is necessary when markets fail due to information asymmetries, or when there is an imbalance of power between buyers and sellers in a market. Left to their own devices, and in the absence of competitive market forces, consumers will often not have the knowledge or ability to make optimal consumption choices. Errors of omission or commission by consumers can be both expensive and dangerous. Increasingly, governments of both developed and developing countries are introducing new, and more stringent, laws designed to protect consumers from a variety of sharp commercial practices. While the principle of`caveat emptor' still needs to be adhered to, consumers are now much better protected from dangerous goods, crooked traders and the perils of less-than-complete information than was the case only a decade or so ago. Among the many new laws typically being passed are laws mandating much more complete disclosure of contents, contract terms and operating and care instructions. Strict liability for dangerous goods is now common. But more consumer protection is not necessarily a good thing. As with any type of government regulation, there is an optimal level of intervention, beyond which the net marginal bene®t of interfering with the market becomes negative. And the ef®cient solution is not necessarily the most direct one. Consumer education plays a very important role in alerting buyers to the sorts of questions to ask in order to make informed choices. While consumer protection does have some of the characteristics of a public good ± it is largely non-excludable and non-rival in consumption ± it can also be obtained, ex-post, through private action. Such actions are largely undertaken by bigger, better-informed, wealthier buyers who should, in theory, be better able to protect themselves ex-ante compared with smaller, less wealthy individuals. But such market-driven consumer protection may not produce lasting or widespread dissemination of bene®ts for other consumers, unless it alerts governments to problems which they then attempt to ®x. Major issues in consumer protection involve deciding how much information to provide to buyers, how this is best done and determining the extent to which producers must be held liable for hazardous goods. The answer will vary greatly from product to product, technology to technology, and from country to country. There are ®ve papers in this issue which confront these problems. The ®rst by Rhonda Smith describes the evolving, and on occasions world-leading,