Question

In the US, a cash market for kidneys is not allowed. That is, one is not allowed to sell one’s kidney (or another’s) for money nor profit. Discuss the problem of allocating kidneys without a cash market and discuss how a cash market might solve the problems of those who might supply or demand a kidney. Following Hazlitt, include as part of your discussion not only the groups directly party to such a cash market transaction, but also at least one party not directly involved that would be impacted by the market’s creation.

Answer 1

If a cash market is not allowed, an underground market will be created, which is precisely the case of kidney trading. Without a proper market mechanism, there are externalities (kidney doner will face health consequences for which he/she might not be compensated) and information asymmetry (doctors involved in illegal trading can exploit both doner and the one who needs it). Furthermore, Black market is difficult to track, so economy is deprived of revenue.

If a cash market is allowed, then suppier and demanders can freely interact. Price of kidneys can considerably come down because middlemen are kicked out. Regulations in cash market can further stop exploitation of both suppliers and demanders. Cash economy can also help government raise taxes on such interactions because it is easy to quantify the size of market. Even after tax, price of kidney will be much lower than in black market because transaction become easier due to cash market.

One party that is not directly involved but would be impacted by market ceation is the government. This is because it can raise revenue and create a thriving market to attract demanders from abroad as well.