Fri, 12 Mar 2004

Are Lemon Laws useful?

A Canton, NY auto dealership was cited for tailing to identify one of its vehicles as a "lemon". This is another example of the principle that rules don't lead to freedom. Instead, rules lead to more rules. The state of New York has a "Lemon Law", which says that if a new car goes in the shop four times (three times for a used car) to fix the same thing, the car is a lemon. You can return it and get your money back.

Let's think about this law as economists. Is it a good law or a bad law? One's instinct is, and should be, to not interfere in the workings of the marketplace. After all, if people wanted protection from buying a lemon, they would purchase lemon insurance, or buy from a dealership with anti-lemon policy. Why is this law at all conscionable?

In fact, the law might not be conscionable. Who gains and who suffers from it? Obviously, it imposes a risk on a dealership that a car will be judged a lemon, and they'll have to take it back. While that may seem on one hand to be entirely within the control of a dealership (fix it on the first three tries), it will lead to risk-avoidance behavior. A dealership will be more likely to do a more expensive repair than otherwise. Instead of attempting to fix something, they'll replace it outright.

Some might say "Well good enough!" to that. But remember that in a free market, eventually price == cost. Anything that increases the cost of an automobile will in time be reflected in the price of the automobile -- including risks placed on a dealership.

It imposes a cost on taxpayers -- even taxpayers who do not purchase cars. You can argue that, well, nearly everybody buys a car now and then, so it's okay to impose on the few that don't. Perhaps the few feel differently? But they're a minority and voting their desires is a guaranteed loss.

Who gains from this? That's harder to say. The person who gets their money back? In the end, they still don't have a useful car, which was what they wanted in the first place. They're still out the time it took them to deal with the malrepaired car.

People don't buy that many cars in their lifetime. There's not much opportunity in the way of repeat business, given how much people move around. And yet, dealerships can be seen to be concerned about their reputation. Someone who has gotten a lemon will surely be cautious about purchasing that brand of car from that dealership ever again. They will also undoubtedly be seen to be unhappy.

I think that, on the whole, it would be better to let the usual market process of business reputation work. A law has its compliance overhead, as the Canton dealership found to its loss. Not clear that that overhead is better than the overhead of letting the business's reputation speak for the quality of its cars.

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