Response to "Information Wants to Be Free"

a.) One passage from McMillan's chapter four that I found interesting was the difficulty of finding high quality milk in some Indian cities. To increase profits, milk vendors would water down their milk. Buyer were able to judge whether or not the milk was fresh, but they had no way of measuring the quality of the milk (butterfat content). Due to this low quality of milk, the sales declined and per capita consumption fell 25 percent from the previous twenty years. Eventually, India did solve this low-quality milk issue. India's National Dairy Development Board in the 1970s provided inexpensive machines that would measure the butterfat content of milk at each stage of the distribution chain, from farmer to wholesaler to vendor (52). Brand names were also created to give consumers more trust in their sellers. As a result of these changes, consumption rose and the quality of milk improved. This was interesting for me because this was another example of a subtle transaction cost that there is difficulty in observing quality. This point was a little difficult for me to visualize, I think because the quality of goods in the United States is generally relatively high. So, this example of the milk market in India helped me understand this transaction cost more effectively.

b.) By transaction costs, the author means that certain things create market frictions or don't allow the market to function as well as it is able to. There are two types of market frictions that come from the uneven distribution of information in a market: there are search costs and evaluation costs. "There are search costs: the time, effort, and money spent learning what is available where for how much. And there are evaluation costs, arising from the difficulties buyers have in assessing quality. A successful market has mechanisms that hold down the costs of transacting that come from the dispersion of information" (44).

c.) The effects that arise from imperfect information are evident in the bazaar's that are characterized by high prices solely due to the buyers lack of information about the normal price levels and the ability to judge the quality of the good being sold. Another example of the effects of imperfect information is the 25 percent per capita consumption decrease of milk sales in Indian cities. Sellers were diluting their milk products, but buyers had no way of judging the quality of the milk and would continue to buy the low quality products. The inability to judge the quality of the product directly cause the decline in milk quality and sales. Dishonest sellers gain when information is unevenly distributed, and honest sellers go out of business. Consumers also lose because they have no way of knowing whether or not they are buying a quality good, or they have no way of knowing if they are buying their good at a reasonable price.