| Fast food restaurants are profitable not because they are efficient, but because fast food restaurants have an information advantage over independent restaurants. This is well-known in economics as 'The Lemon Problem', named after the dynamics of the used car market, which prevents high quality used cars from being sold and creates a a market that will only sell lemons (cars with problems). Sellers of used cars know whether their car is a lemon, but buyers don't. As a result, all cars of a certain model, lemons or not, will sell for the same price. Because of the risk of buying a lemon and the lack of information about which cars are lemons, buyers won't pay full price for a good used car. Eventually, sellers of non-lemon used cars refuse to put their cars on the market (they won't sell at a lemon price), and so all used cars sold are lemons.
This situation is a market failure that takes high quality goods off the market because buyers have less information about the product than sellers. Without intervention by some third party, there is just a competitive advantage to sellers of lemons over sellers of non-lemons. And so non-lemon sellers go away, even if buyers want good used cars and are willing to pay for them.
This dynamic happens in the restaurant business as well. If you go to McDonald's, you know what you're getting, even if you don't like it that much. If you go to Joe's Diner, it may or may not be good, but it is a new and unpredictable experience. A customer knows McDonald's serves low quality predictable cheap food. If the customer goes to Joe's Diner, there is a good possibility that he will get low quality food, and so he will pay only low prices even if he were willing to pay high prices if he knew the food were healthy. This drives healthy restaurants out of the market, and franchise restaurants can out-compete low quality independent restaurants. It's the lemon problem. Without some sort of intervention, restaurants that serve healthy food just won't exist in Southern LA except as anomalies.
Is reducing fast food options a good policy response if your goal is to increase diversity of eating options that serve healthy good? It probably is a necessary but not sufficient condition. Without more information about the food they are buying, customers will still be unwilling to pay anything but the 'lemon' price for food, since they don't actually know if the food they will get at an independent restaurant is healthy. Eventually, restaurants can develop reputations and overcome this information problem, but that takes time and less competitive pressure from low quality chains. So certainly, it is useful to pull the low quality predictable options out of the market, because that will allow a diverse set of new competitors who would have been at a strong information disadvantage to franchise restaurants to start up and flourish.
All of this is along way of saying that the analysis of both Yglesias and Boaz is still organized around the idea that markets deliver perfect competition and efficiency, and the question is how much to reduce that efficiency in service to social goals using government action. I don't think that's the right framework to use to work through policy ideas, because market failures do exist and create situations where fast food restaurants dominate an area's dining options even when people don't like them that much and obesity is an epidemic. And conversely, there are cities like San Francisco where there are an absurd number of different high quality restaurants.
I'm going to be playing around with this kind of analysis a bit more on OpenLeft, so forgive the poor writing style. I'm unlearning the free market economics I got from Marty Feldstein as a freshman in college. |
