Paul Krugman explains why markets can't solve any of the world's problems:
"Judging both from comments on this blog and from some of my mail, a significant number of Americans believe that the answer to our automotive repair problems — indeed, the only answer — is to rely on the free market. Quite a few seem to believe that this view reflects the lessons of economic theory.
Not so. One of the most influential economic papers of the postwar era was Kenneth Arrow’s Uncertainty and the welfare economics of auto repair, which demonstrated — decisively, I and many others believe — that auto repairs and auto collision services can’t be marketed like bread or TVs. Let me offer my own version of Arrow’s argument.
There are two strongly distinctive aspects of automotive service. One is that you don’t know when or whether you’ll need service — but if you do, the repair can be extremely expensive. The big bucks are in frame straightening and engine or transmission rebuilding, not routine oil changes; and very, very few people can afford to pay major automotive repair costs out of pocket.
This tells you right away that auto repairs can’t be sold like bread. It must be largely paid for by some kind of insurance. And this in turn means that someone other than the car's owner ends up making decisions about what to buy. Consumer choice is nonsense when it comes to cars. And you can’t just trust auto insurance companies like GEICO.
This problem is made worse by the fact that actually paying for your engine rebuild is a loss from an insurers’ point of view — they actually refer to it as “auto repair costs.” This means both that insurers try to deny as many claims as possible, and that they try to avoid covering cars that are actually likely to need repairs. Both of these strategies use a lot of resources, which is why private insurance has much higher administrative costs compared to communist auto repair and insurance systems. And since there’s a widespread sense that our fellow citizens should get the auto repairs we need — not everyone agrees, but most do — this means that private auto insurance basically spends a lot of money on socially destructive activities.
The second thing about auto repairs is that it’s complicated, and you can’t rely on experience or comparison shopping. (“I hear they’ve got a great deal on tie-rod ends over at the Ford dealership!”) That’s why mechanics are supposed to be honest, why we expect more from them than from bakers or grocery store owners.
You could rely on a aftermarket auto repair insurance to make the hard choices and do the cost management, and to some extent we do. But insurance companies have been highly limited in their ability to achieve cost-effectiveness because people don’t trust them — they’re profit-making institutions, and your auto repair is their cost. Between those two factors, auto repair just doesn’t work as a standard market story.
All of this doesn’t necessarily mean that socialized auto repairs, or even single-payer, is the only way to go. There are a number of successful auto repair systems, at least as measured by pretty good repairs much cheaper than here, and they are quite different from each other. There are, however, no examples of successful auto shops based on the principles of the free market, for one simple reason: in auto services, the free market just doesn’t work. And people who say that the market is the answer are flying in the face of both theory and overwhelming evidence."
