Insofar as she is good, we can trust her. But goodness is scarce. We don't need to watch the owner of a Dairy Queen franchise to make sure she keeps her fridge plugged in. As the residual claimant, she has ample incentive to watch herself. Thus, we get the desired social outcome, good ice cream at low cost, without requiring any goodness on the part of the businessmen.
Profit solves the problem of who watches the watchmen.
The information conveyed by prices is effective knowledge. If the lease on her building increases, that doesn't merely convey the information that its value in alternative uses has increased, it gives the franchise owner an incentive to heed that knowledge and give the building up to another user. Return to main Apology page. This page maintained by Steven Blatt . Suggestions, comments, questions, and corrections are welcome .