When we find a product artificially undervalued, then we also expect to find a run on that product, and subsequent lines or ques. Recently at the local Orange County, California public libraries, for example, for about a year, printing from the internet computers was free. The Costa Mesa Technical branch, in particular, which features about 30 fast computers with LCD screens, also started out with a couple of very nice Kodak wax transfer hi-res color printers, which can provide a nearly magazine-cover glossy color print.

The consequence was predictable: some people took advantage. One night, a couple of ministers from different Christian sects battled over who would control the printers to print out their Church literature. Presumeably both called on divine assistance. Both ultimately left in disgust, with a week's worth of printing backed up, preventing any of us sinners from using the printers at all, as the software did not then allow the librarians to selectively cancel print jobs..

A lady used to come in every night, invariably asking for multiple extensions on her free one hour on the net, so that she could also jam the entire system with hundreds of full color prints of stock market charts. I tried to explain to her the simple process of cut and paste, by which she could have grabbed only the information she actually needed and then printed it by itself. To no avail...

Finally, the libraries instituted a charge of 15 cents per page of printing, and, lo and behold, suddenly everyone was able to print, and the lady stopped coming at all.

Virtually anything or any aspect of any thing which is of limited availability can fall prey to this problem. In Russia under the communists, there was a production problem for consumer goods.

But, the Russians could not admit that they couldn't outproduce the evil capitalist countries, so they set the prices low for basic items. As a consequence, there were long lines for virtually everything. Thus, that became part of the cost of the item, and ones position in line became a marketable commodity. Of course, a healthy black market was also a major feature of the Russian experience. You could avoid the lines if you paid the right bribe, in cash, sexual favors, or whatever you had to barter.

In perhaps the worst case example, the Russians boasted that they always had plenty of bread. And they did. They virtually gave it away at vastly subsidized prices, and the lines there were REALLY long, as people filled up wheelbarrows and wash tubs with bread to feed their pigs or chickens or brew kitchen vodka or burn in their fireplace or whatever.

The economist son of Nobel Prise Laurette Milton Freidman, David, once gave a talk on the subject of how econimists thought about things. One of his examples was the import fee structure of India. Typically, India would assess an import duty on manufactured goods equal to the cost, so everything cost double as a consequence. However, for special needs there were waivers of the import duty, available from your local bureacrat. Now guess how much the average waiver backsheesh was? How about just under the cost of the item? The savings from making a bribe were just enough to pay for the time lost by the average importer.

Now let's look at a market commodity called risk. Risk is a measure of the liklihood that an investment will fail, failure being defined on a spectrum from negative return on investment to lower than hoped for yield. Market analysts spend their lives on calculations of risk, and we all make decisions every moment of our lives in which risk is almost automatically factored in.

There is a real, but small, risk, for example, that we might have a major earthquake and our roof might collapse on us. But we still live under roofs that might kill us, altho some of us might be keeping in mind where the exits are and the table legs, in case we decide to duck and cover.

On the other end of the risk spectrum, salesmen deal constantly with the risk of not making a sale. In fact, for many salesmen, the risk of not selling is 90% or more per attempted sale. However, the 10% is sufficient to pay for the 90% waste.

What happens when you impose artificial limits on risk? For example, the power industry wanted to build nuclear power plants in the 1950's, but they couldn't get insurance. Why was that?

Well, the insurance companies are the experts on risk. They maintain endless actuarial tables showing what the expected risk for various ventures is, so that they can offer insurance rates that are high enough to cover the expected risk, but not so high that their competition will undercut them.

They told the power companies that they absolutely could not offer them insurance, without which the power plants could not be built. The reasoning of the insurance giants, who were the experts in assessing risk, remember, went along these lines:

We do not know what the risks associated with a nuclear power plant are. We do know that they could be disasterously high, involving massive loss of human life and permanent contamination of large urban areas. This risk might be very small, but if it comes due, it might be catastophic, utterly destroying the insurance company. No expert can convince us that the risks are exagerated, as we have no track record and we can't even accurately assess who would be a proper expert, so we simply cannot proceed responsibly.

Of course, they may have added (and almost certainly did), we would really LOVE to have your business; so, if you were to have a law passed specially for you, putting a cap on your liability by state fiat, then we can talk.

And they did. The law was passed putting an $800 million dollar cap per incident on the nuclear power plants. Now what do you suppose was the market result? The price of risk was artificially lowered, just like bread in Russia, or color printouts at the library. And the ques began to form, starting with the insurance companies, fighting for access to cheap risk.

The impact on the actual power plants is harder to measure. Risks with payoffs below $800 million would not be effected, of course. But, anything over $800 million was discounted. If you had two courses of behavior, each of which had a one in ten thousand chance of resulting in a loss greater than $800 million, which course would you adopt? Economically, the right answer is whichever is otherwise cheaper.

So, you figure that if the plant is blown up by terrorists, then the actual losses will be upwards of 100 Billion dollars. Maybe you could reduce that to 50 billion (meaning tens of thousands fewer deaths) by incorporating designs that specifically addressed that kind of catastrophic failure of containment. But, where is the profit? 50 billion or 100 billion, your loss stops at 800 million.

In terms of economic decision theory, a simplified model illustrates the issue: Assume you have a downside of $100 billlion for a particular set of threats, with a one in ten thousand chance of one of them actually happening. The expected cost, then, is $100,000,000,000 x .0001, or $10 million. On that basis, you can economically justify to your stockholders spending up to $10 million to eliminate that risk altogether.

Since that is unlikely, however - that you could entirely eliminate that risk, then you look at various types of expenditures that could be expected to reduce either the total cost of $100 billion, or the likelihood of 1/10,000. Before you spend the money, you have to show that the expected cost has been reduced. If, by spending $4 million, you can reduce the $100 billion to $50 billion, then, if there aren't any better options, that would be a justifiable expense, as your expected cost would have been reduced from $10 million to $5 million, for a net gain of $1 million. However, capping your total liability to $800 million, means that these calculations no longer make any sense. Why spend any money if the scenario is going to go over the cap regardless?

Eg., you might put in enhanced security that might be able to slow the terrorists down and at least get a warning out to the surrounding population a little quicker. And you might consider a warning system that would give people a chance to get out of harm's way. Or a bunch of robotic buldozers that could move right in like Chernoble, but without killing the operators. But, many of these options would be expensive, and they would not have much impact on a 799 million dollar accident, while they would cut tens of billions off a really big one. So, why bother?

And this, indeed is what we now know really and truly happened. Because after 911, we checked around and discovered that the nukes had abysmally lousy security, that ANY half-competent team of terrorists could penetrate. So, we ordered them to fix it, and that took care of it, right?

Not. It only required that they move on a limited set of options to satisfy the inspectors. There was still no incentive for the management to proactively move to reduce the really catastrophic risk. Given the cap on liability, how would they even begin to make the calculations? And money spent to decrease higher risks would mean less money available for risks below $800 million, so the management has every incentive to minimize those expenditures.

And it's doubtful that they in fact could do much anyway, at this point. They have incorporated the artificially low risk structure into every aspect of their design and function. Not because they are BAD people, but because they were handed a business situation and had to make the best of it or go out of business. (Let's not give any more of that store away... ok???)

Now consider the fact that the very incentive for the existence of the corporate business model is the artificial cap on risk. Ltd. "Limited Liability" by state fiat. And now we have literally millions of these artificial persons with caps on their liabilities. And they DO behave accordingly, even though most of them are perfectly fine people, just trying to run a business ... just like the nukes.

And I mean, multi-national trashing of the ecosystem, ENRON gaming the market, slave labor burgeoning in the 3rd world, while viable native farmers are being wiped out to support less efficient and ecologically destructive corporate farms. And that's just the tip of the iceberg created by artificially lowering the cost of risk. Just write off the really bad consequences or isolate them to a subsidiary like ENRON did.

Is it any wonder what a mess we're in? It's the kind of mess you get into when you start denying reality. Risk is a fact, like bread, and just as real. You don't legislate it away, any more than you can repeal the law of gravity. Risk IS. Who pays for it is another question.