This article draws on and expands my earlier empirical study of the rare coin grading industry (Cobin 1997). Major additional contributions are to (1) show the significant and important changes in the market during the last two decades (different firms, improved services, and greater competition); (2) add important and essential information that was missing or unknown due to innovations that have occurred in a now much more mature market; (3) vastly improve the tables with more data and comparative statistics that support the case for market regulation; and (4) provide details of the historical development of the industry. This updated study confirms that the industry provides high-quality, market-based regulation at low cost for the multibillion-dollar rare coin marketplace. Ease of entry has have permitted dozens of firms to compete, forcing the current 13 survivors to improve quality. Prices for the best firms' services remain low even though higher than in 1994 because of quality improvements. As a result, a strong case can be made for replacing government "public interest" regulation with more efficient market-based regulation, which emerges spontaneously to satisfy consumer demand.
Government versus Market Regulation
Many studies have appeared in the last few decades that suggest that government-enforced codes and regulations often fail to improve safety and quality. Without a market test, there can be no assurance that the benefits of regulation exceed its costs. Government regulators face different incentives than private ones, which actually impel them to be inclined to overlook infractions. Public choice problems relating to inefficient institutions, rent seeking, regulatory capture, and perverse incentives--as well as the knowledge problem--preclude government regulation from being effective in producing higher levels of safety and quality (Holcombe 1995).
Politicians and bureaucrats who implement public goods programs are always constrained by such public choice impediments. When government fails--that is, provides less net welfare (considering the cost of taxes and public inconvenience) than what can be obtained through market forces--there is no longer any justification to continue its regulatory activities. However, when private interests can be served indirectly through a regulatory apparatus to reduce competition, damage competitors, and force consumers to buy their products, an incentive is created to find some public interest purpose that can provide the needed justification (Cobin 2014: 190-92). If, at the same time, politicians and especially bureaucrats can benefit from such disguised private interest regulation--through larger status-enhancing budgets, greater job security, more power, and indirect perks--they will have an even stronger incentive to regulate (Niskanen 1971, 1994; Simmons 2011). In the last several decades, the economics literature has called into question the notion that bureaucrats will work to serve the public interest. As Nobel laureate James M. Buchanan (1991: 37) stated, "The mythology of the faceless bureaucrat following orders from above, executing but not making policy choices, and motivated only to forward the public interest,' was not able to survive the logical onslaught" from public choice theory.
In an attempt to find a remedy for government failure, at least in the arena of regulation and planning, a literature has evolved that promotes the idea of market-based regulation (e.g., Alger and Toman 1990; Blundell and Robinson 2000; Cobin 1997, 2013a, 2013b, 2013c; O'Driscoll and Hoskins 2006; Poole 1982; Benson 1989). This article provides a case study of grading and evaluating in the rare coin industry that tests the hypothesis of this literature: When competition and concern for reputation are present, markets will spontaneously emerge to efficiently regulate the quality of goods and provide consumers with essential information (De Alessi and Staaf 1994, Klein 1997, Komhauser 1983, Shapiro 1983).
Under normal circumstances, there is no reason to believe that market provision will fail. Certain services might be under-supplied if people who do not pay for them can benefit from them. However, the existence of positive externalities does not necessarily preclude market provision. This article builds on the evidence from my study of the rare coin industry and helps determine whether quality assurance is a public good that should be provided by government or merely a private good that can be provided by the market.
Savas (1982) has argued that government is wasteful and substantial privatization is in order. Likewise, Schmidtz (1991) has made the case that private enforcement mechanisms like "the assurance contract" or other voluntary solutions might be used to replace government's role in public goods production, because the free-rider problem cannot justify coercion. In his view, "government is itself an imposer of negative externalities" (Schmidtz 1991: 89). Foldvary (1993) points out that (1) the nonprovision of a public good becomes a public bad, (2) determining the optimal provision of a public good is a highly problematic process, and (3) governments are unlikely to relinquish power voluntarily.
There is theoretical support for the privatization of public services. Government enterprises have higher costs of production (Lindsay 1976); private airlines are more efficient and productive than their public counterparts (Davies 1971); and inefficient state-owned copper mines do far worse than privately owned mines (Villagran and Vermeo 2013). Surely, the last 50 years is replete with examples of public enterprises that are less efficient than private ones. If decision-makers have neither an ownership interest in their organization nor direct accountability to the owners, then both the organization and decisions will be subject to perverse incentives and distorted resource allocation.
Market failures are cited as the main justification for government intervention. However, the articles in Cowen's (1988) compendium, The Theory of Market Failure, strongly suggest that the theory of market failure has theoretical and empirical shortcomings. Externality and free-rider theory is particularly questionable (see e.g., the essays by Brubaker, Buchanan and Dahlman, Demsetz, Goldin, and Tiebout in Cowen 1988). Indeed, many important case studies that provide empirical critiques of market failure theory show that alleged cases of public goods can be provided by markets. These include Coase (1974) and Mixon (1992) on lighthouses, Cheung (1988) on the interaction between bees and apple blossoms in honey production, Poole (1982, 1988) and Cobin (1997, 2013a, 2013b, 2013c) on fire safety, and High and Ellig (1988) on the provision of education in the United States and Great Britain. Therefore, many of the goods and services often considered to have a public nature may be provided by markets. As de Jasay (1989) notes, it is also possible that the incidence of public goods in modern economies has been exaggerated, leaving room for efficiency improvements by policies that commend market alternatives. He argues that voluntary participation in collective action often is consistent with self-interest.
Holcombe (1995) and Sowell (1996) extend Austrian economic insights by Mises and Hayek about knowledge to show that government provision of collective or public goods will not be efficient. If planners were omniscient, then they might be able to plan effectively. However, they are not omniscient (even as a committee) and are thus wholly incapable of planning either effectively or efficiently--no matter how altruistic they might be. Moreover, it may not simply be assumed that regulations actually accomplish what they are intended to do because of public choice problems, including agencies having a natural inclination to favor the industries they regulate. The problems of inadequate knowledge, perverse incentives, and inefficient institutions must be taken seriously when evaluating public provision of private goods.
The studies already noted have shown that consumers can be protected without government regulation. O'Driscoll and Hoskins (2006) provide additional cases of private regulatory alternatives that work well: free banking (without a central bank or its regulation), currency emission, arbitration and customary law, brand name generation, approval seals like Good Housekeeping, and quality certifiers like Dun & Bradstreet and Underwriters Laboratories. More of such institutions would exist, except that the government crowds them out. As Holcombe (1995: 103-4) writes, "With this illusion of a government umbrella protecting everyone from harm, there is relatively little public demand for private regulation."
It is evident that consumers are not entirely satisfied with governmental information generating services. The existence of institutions like the Underwriters Laboratories, founded in 1894 by insurers to provide risk data, and the Hearst Empire's Good Housekeeping seal of approval, a magazine marketing approach used from 1910 to the present day, are market mechanisms that augment the standard-setting and regulatory infrastructure. However, the former has a tacit connection with government through its entwinement with the state's regulatory apparatus and by potentially providing assistance for manufacturers that seek government privileges, while the latter is more of a marketing technique than a serious quality-certifying firm--making both of them poor examples of market-based regulation. Alternatively, the sports card (Dobrow 2014) and gemstone (Cobin 1997: 105-6) grading and certification services are good examples of market-based regulation. However, they are not as impressive or mature as the rare coin industry, which provides the best case to date of pure market-based regulation.
Consumers want to know more than just basic characteristics about an expensive...