Markets and information  

There's more on the terrorism futures market here, from the guy who wrote my intro econ text. Also Haggai links to this article by Joseph Stiglitz in comments.

I find it interesting that everyone has such a negative reaction to the idea of markets as information aggregators. OK, I can understand the revulsion at the possibility that someone would profit from an attack, but as far as making accurate predictions based on the available information, markets are the best tool we have, especially when they're abstracted so that for instance the flow of information (about what's being bought and what's being paid for it) is widely known.

Yes, in the case of some markets, there are equity problems - when you're talking about the markets for housing or grain or Enron stock, there might be information flow impediments or resource distribution problems that lead to an unfair outcome, in some cases to an inefficient outcome. But when you're using a market as an information aggregator, these equity problems (and I do think they can be profound problems) simply aren't relevant.

Americans' attitudes toward markets are bizarre - for instance we don't use them to allocate pollution rights like the Europeans do. This essentially means we have a very inefficient environmental bureaucracy, but everybody has the right to pollute the same amount. Europeans impose taxes, which create a market for pollution, and the rights to pollute are allocated to the people who need them most. This may sound funny, but it means that the companies that can afford it given their cost structure get to do their polluting, while others don't. And since the cost structure depends on demand within the market, the system ends up aggregating the priorities of the citizenry. Setting the tax higher or lower will change the level of extant pollution, so that any acceptable level can be reached. For some reason Americans are caught up on the fairness of allowing one company to pollute more than another based on cost structure - but why are we talking about a "right" to pollute at all? I find this totally baffling.

MORE: PG emails this response (also more here):

Regarding markets and information, I think it's useful to have markets if they create incentive for people to analyze information. But I don't know how we possibly could have a greater incentive to analyze information about terrorist attacks than our fear of death and destruction on American soil. If somebody who wants to make a buck is more incentivized to think hard about available information than the CIA et al are, we need to light a fire (perhaps literally) under the asses of our intelligent people.