The Market Kills Its Own Heroes

 When a Life-Saving Drug Cannot Survive the Market

What should happen when a company develops a drug that society urgently needs? Most people would say that this company should succeed, as an efficient market should give high return to goods with high demand compared with its supply. However, the story of Achaogen, a biotechnology company developing a new antibiotic called Plazomicin, isn’t like this.

 

Achaogen spent 15 years and hundreds of millions of dollars to develop Plazomicin, a new antibiotic to treat superbacterial infections that can no longer be cured by previous antibiotics. But less than a year later, they went bankrupt. Their core assets were sold for only $16 million (Wells, Nguyen and Harbarth, 2024). It’s a really amazing business story. It shows how the market will fall when private incentives couldn’t match social value. So here's the question, why can’t an invaluable drug support the success of the company that developed it?

 

Plazomicin was so powerful that doctors refused to prescribe it widely, keeping it locked away as a last resort so bacteria wouldn't develop resistance to it. Completely the right medical call, but it’s completely catastrophic for business. With barely any sales and a healthcare system that didn't reward innovation, the company couldn’t survive.

 

Market Failure in the Antibiotic Industry

The collapse of Achaogen is a market failure rather than a business failure. To understand why Plazomicin couldn't survive in the market, we must look at marginal private benefit (MPB) and marginal social benefit (MSB) of consuming Plazomicin.

Figure 1: Negative Externality

 

Take a look at Figure 1. In reality, the cost of producing additional medicine is constant and that’s our horizontal marginal private cost (MPC) line. The marginal social cost (MSC) and supply (S) curves are identical to MPC. Imagine that producing Plazomicin doesn’t generate negative effects on the environment and society. However, consuming more Plazomicin would lead to a significant and increasing marginal external cost (MEC_C), as antimicrobial resistance is one of the top global public health threats, and the overuse of antimicrobials is the main driver in the development of drug-resistant pathogens (World Health Organisation, 2023). Also, the level of resistance is correlated with the level of antibiotic administered (Bell and Gouyon, 2003). The MPB and demand (D) curves are negatively sloped. Imagine when you’re ill and take one unit of medicine, the condition would become better obviously. However, after consuming the second unit, the effect wouldn’t be as visible as the previous one. The MSB equals MPB – MEC_C.

If the government doesn’t control using antibiotics, the equilibrium would be at point A. However, under Q₂, the society bears too much risk that this kind of antibiotics would lose its effect soon because of the overuse. Therefore, the state must use policies to limit people to use it, controlling the equilibrium from A to B and the quantity from Q₂ to Q_1.

 

Misaligned Incentives and Moral Hazard

The persistence of Q₂ is driven by the moral hazard among consumers. More antibiotics use can bring clear private benefits. Patients using more of it would recover quicker. However, there’s a wider cost, like more antimicrobial resistance, fewer effective drugs in the future and greater pressure on the health system. It’s not only attributed to some specific consumers who overuse antibiotics, but also affects the whole society.

 

That’s where the incentive problem comes in. Patients may consume antibiotics all the time until their MPB matches MPC, even though the MSC is much higher.

 

What’s more frustrating is that it’s in stark contrast to the situation in the pharmaceutical industry. Companies which develop new antibiotics face the opposite incentive problem. They need to bear huge research and development costs and face years of uncertainty. Even if it is successfully listed, the economic return may be negligible (Wells, Nguyen and Harbarth, 2024). The collapse of the Achaogen company after the launch of Plazomicin is a strong example of this broken system. Innovation comes with risks, but the market does not provide enough rewards to maintain such innovation.

 

Therefore, the antibiotic market has suffered a double blow. For companies trying to solve this problem, the market returns are often unsatisfactory. On the other hand, it underestimates the costs of action that exacerbate the problem. This kind of social cost is extremely huge. According to the Centers for Disease Control and Prevention (CDC), antimicrobial resistant infections affect more than 2.8 million people in the United States every year. Also, it causes more than 35000 deaths (CDC, 2024).

 

For that reason, antibiotic resistance should not be seen only as a medical problem. It’s also an economic problem driven by misaligned incentives.

Why Can’t the Market Correct Itself?

If the incentive mechanism is so distorted, why can't the free market solve it? Coase's theorem refers that if property rights are defined, private sectors can negotiate to get an efficient outcome.

 

However, the example of antibiotics is not suitable here. No one can easily own or trade the future effectiveness of drugs. Also, affected populations include patients, hospitals and governments in many countries, so transaction costs are huge. Therefore, the government's structural intervention is essential.

 

Curing the Market

So, how could policymakers intervene both overconsumption and underinnovation?

1. Reduce the use of antibiotics: Policymakers need to reduce unnecessary use of antibiotics. This doesn’t mean to set the price higher. Patients in need shouldn’t be excluded. A more effective method is to manage stricter. Stricter prescription rules should be utilised to ensure that strong drugs like Plazomicin are only used when truly necessary.
2. Delinking Profit from Volume: The government should decouple profit from volume to solve the dilemma. The British National Health Service (NHS) recently launched a subscription model, which requires a fixed annual fee to get new antimicrobials, no matter how many pills are actually prescribed (National Institute of Health and Nursing Excellence, 2019). This cuts off the link between profit and sales, thus rewarding those companies that develop drugs.

In conclusion, the collapse of Achaogen is not just a story of a failed company. It also reminds us how important it is to recognize the limitations of the market. We need Plazomicin, but we also need to use it carefully. Therefore, the usual market logic is not applicable. Without strict policy intervention to protect innovations, the tragedy of Achaogen may occur frequently, and the society will continue to lose valuable medicines.

References

Bell, G & Gouyon, P.H. (2003). ‘Arming the enemy: the evolution of resistance to self-proteins’, MICROBIOLOGY SOCIETY, 149(6), pp.1367. https://doi.org/10.1099/mic.0.26265-0. (Accessed: 7 April 2026).

 

Centers for Disease Control and Prevention (CDC) (2024). Antimicrobial Resistance Facts and Stats. Available at: https://www.cdc.gov/antimicrobial-resistance/data-research/facts-stats/index.html. (Accessed: 7 April 2026).

 

National Institute for Health and Care Excellence (NICE) (2019). A new model for evaluating and purchasing antimicrobials in the UK. Available at: https://www.nice.org.uk/what-nice-does/life-sciences-how-to-get-your-product-to-market/a-new-model-for-evaluating-and-purchasing-antimicrobials-in-the-uk.(Accessed: 7 April 2026).

 

Wells, N., Nguyen, V.K. and Harbarth, S. (2024). Novel insights from financial analysis of the failure to commercialise plazomicin: Implications for the antibiotic investment ecosystem. Humanities and Social Sciences Communications, 11, 941 (2024). Doi: https://doi.org/10.1057/s41599-024-03452-0. (Accessed: 4 April 2026).

 

World Health Organisation (2023). Antimicrobial resistance. Available at: https://www.who.int/news-room/fact-sheets/detail/antimicrobial-resistance. (Accessed: 18 March 2026).

Why Your Health Insurance Costs a Fortune (Blame the Lemons)

 

As a student I do silly things, but I am healthy for the most part. I rarely find myself needing healthcare. But-and this is a big but- the time I needed it recently, I was shocked to find how expensive it was. 

But why is private health insurance necessary in the UK I hear you ask? Many reasons: long waits, unsatisfactory care and underfunding are seen in the NHS. Private healthcare insurance can be the answer to these issues. But we need it to be affordable…

Having investigated healthcare insurance more, I discovered there are countless issues surrounding the provision of what is presumed to be a necessary good. I found that at the centre is one idea: asymmetric information, and from there two consequences arise: adverse selection and moral hazard. I appreciate this sounds very confusing, and it did to me at first too, so let me elaborate.

 

Problems behind problems

At the heart of this issue is asymmetric information: when one party has more information than the other. Simply put, adverse selection occurs due to asymmetric information. Insurers struggle to verify applicants’ health status, costing them significant amounts of money due to unexpected costs. They recover this by increasing their insurance premiums. This creates a situation where people who are healthy are unwilling to buy insurance at higher prices. This creates an endless cycle where only unhealthy people buy insurance. This is where the market starts to break down. Scary!

A fruit market?

A simple analogy is seen through Akerlof’s work on peaches and lemons (Akerlof, 1970). Peaches are representative of healthy people who bring low risks to health insurers. Whilst lemons represent unhealthy people who constantly make expensive claims. It’s difficult to truly know someone’s health…

Akerlof creates parallels in the second-hand car market between peaches being good cars and lemons being bad cars. Like buyers of second-hand cars, health insurers also cannot tell the difference between low risk and high-risk applicants.

The asymmetric information prompts premiums being set at a price higher than the peaches are willing to pay. As this continues to happen, more peaches leave the market. Consequently, insurance prices increase because insurers need to generate profit after the losses the high-risk lemons cause them. Premiums will be forced higher … Causing disastrous effects! People are driven out of the health insurance market, unable to easily access lifesaving services.

More and more and more issues?    

The adverse selection spiral is reported by the Care Quality Commission, which speaks on the pressing issues of the “unfair provision” of healthcare. There’s a lack of access, and an underprovision in the quality of care received, and this is particularly prevalent in disadvantaged groups. Due to health insurance companies having a lot less money, the quality of their care drops immensely. (Holt and Roberts, 2023).

Let me pose a question: if you knew that any mistake you made would be covered by someone else, would you behave more rashly? This introduces the concept of moral hazard. Moral hazard is not just about people taking greater risks. It also reflects a simple economic idea: once someone is insured, the out-of-pocket cost of healthcare falls, so treatments may feel cheaper. As a result, people may visit doctors more often or accept treatment they might otherwise avoid if they had to pay themselves. A study of Alcoa Inc employees found that more generous insurance led to over $1,200 extra in healthcare spending per person annually, because it felt “free.” (Einav et al., 2013).

The NHS is a clear effort in fixing the issues of failing private health insurance in the UK, but in the NHS, healthcare and overall standards of living can feel like a postcode lottery, with those living in privileged areas receiving better overall care than those in poorer areas. Propper (2024) touches on this: finding that though health supplies are distributed across the UK relatively evenly, people from higher socioeconomic backgrounds tend to receive better treatment quicker.    

 

Solutions?

One solution is making healthcare insurance compulsory. This will prevent peaches from leaving the market. Germany enforced mandatory health insurance, whilst focusing on self-governance, ensuring there is never an underprovision of healthcare or supplies. Compulsory insurance may keep people in the market, but it does not ensure good healthcare. This is seen through the number of people reporting Germany having good healthcare being below the European average. (Zeeb et al, 2025).

Another solution? Nudge people in. Governments can exploit a quirk of human psychology called framing. Which is our tendency to stick with whatever option is presented as the default (Kahneman and Tversky, 1981). The UK proved this works: when workplace pensions switched to opt-out in 2012, participation jumped from 42% to 86% (Department for Work and Pensions, 2023). Apply the same logic to health insurance and the "peaches" stay in the market, stabilising premiums without force.

Disclosure regulations are another option. Before taking out a premium, people would have to disclose their medical history, ensuring everyone gets priced accordingly and preventing people from exiting the market. However, this could worsen inequality — those facing illnesses would be charged higher premiums than healthy people, meaning the people who need health insurance the most could end up being excluded entirely.

 

Solutions in action

In the US, the Affordable Care Act (ACA) transformed the healthcare system. With Obama making “efforts to correct failures in insurance market practices” (Johnson and Johnson, 2023). This aimed to reduce adverse selection and asymmetric information, which would’ve driven healthy individuals out of the market. The ACA implemented policies such as income-based subsidies, improving access to healthcare; however, quality improvements were limited and gaps in coverage remain.

These solutions are unlikely to be effective in isolation and should be combined. Ultimately, The NHS was Britain’s answer to a market that failed, and seeing as private insurance still operates and inequalities persist, Akerlof’s theories remain as relevant as ever. The adverse selection spiral didn’t disappear; it just changed shape.

me pose a question: if you knew that any mistake you made would be covered by someone else, would you behave more rashly? This introduces the concept of moral hazard. Moral hazard is not just about people taking greater risks. It also reflects a simple economic idea: once someone is insured, the out-of-pocket cost of healthcare falls, so treatments may feel cheaper. As a result, people may visit doctors more often or accept treatment they might otherwise avoid if they had to pay themselves. A study of Alcoa Inc employees found that more generous insurance led to over $1,200 extra in healthcare spending per person annually, because it felt “free.” (Einav et al., 2013).

The NHS is a clear effort in fixing the issues of failing private health insurance in the UK, but in the NHS, healthcare and overall standards of living can feel like a postcode lottery, with those living in privileged areas receiving better overall care than those in poorer areas. Propper (2024) touches on this: finding that though health supplies are distributed across the UK relatively evenly, people from higher socioeconomic backgrounds tend to receive better treatment quicker.    

 

Solutions?

One solution is making healthcare insurance compulsory. This will prevent peaches from leaving the market. Germany enforced mandatory health insurance, whilst focusing on self-governance, ensuring there is never an underprovision of healthcare or supplies. Compulsory insurance may keep people in the market, but it does not ensure good healthcare. This is seen through the number of people reporting Germany having good healthcare being below the European average. (Zeeb et al, 2025).

Another solution? Nudge people in. Governments can exploit a quirk of human psychology called framing. Which is our tendency to stick with whatever option is presented as the default (Kahneman and Tversky, 1981). The UK proved this works: when workplace pensions switched to opt-out in 2012, participation jumped from 42% to 86% (Department for Work and Pensions, 2023). Apply the same logic to health insurance and the "peaches" stay in the market, stabilising premiums without force.

Disclosure regulations are another option. Before taking out a premium, people would have to disclose their medical history, ensuring everyone gets priced accordingly and preventing people from exiting the market. However, this could worsen inequality — those facing illnesses would be charged higher premiums than healthy people, meaning the people who need health insurance the most could end up being excluded entirely.

 

Solutions in action

In the US, the Affordable Care Act (ACA) transformed the healthcare system. With Obama making “efforts to correct failures in insurance market practices” (Johnson and Johnson, 2023). This aimed to reduce adverse selection and asymmetric information, which would’ve driven healthy individuals out of the market. The ACA implemented policies such as income-based subsidies, improving access to healthcare; however, quality improvements were limited and gaps in coverage remain.

These solutions are unlikely to be effective in isolation and should be combined. Ultimately, The NHS was Britain’s answer to a market that failed, and seeing as private insurance still operates and inequalities persist, Akerlof’s theories remain as relevant as ever. The adverse selection spiral didn’t disappear; it just changed shape.

Reference List

Akerlof, G.A. (1970). The market for 'lemons': Quality uncertainty and the market mechanism. The Quarterly Journal of Economics, 84(3), pp.488–500. doi:10.2307/1879431.

Busse, R., Blümel, M., Knieps, F. and Bärnighausen, T. (2017). Statutory health insurance in Germany: a health system shaped by 135 years of solidarity, self-governance, and competition. The Lancet, 390(10097), pp.882–897. doi:10.1016/s0140-6736(17)31280-1.

Claude (2026). Peaches vs lemons: Akerlof's market for lemons illustrated [Digital illustration]. Generated by Claude Sonnet 4.6 (Anthropic). Available at: https://claude.ai [Accessed: 27 March 2026].

Department for Work and Pensions (2023). Workplace pension participation and savings trends of eligible employees: 2009 to 2022. GOV.UK. Available at: Workplace pension participation and savings trends of eligible employees: 2009 to 2023 - GOV.UK

Einav, L., Finkelstein, A., Ryan, S.P., Schrimpf, P. and Cullen, M.R. (2013). Selection on moral hazard in health insurance. American Economic Review, 103(1), pp.178–219. doi:10.1257/aer.103.1.178.

Holt, A. and Roberts, M. (2023). Two-tier care crisis: People forced to pay or wait. BBC News, 20 October. Available at: https://www.bbc.co.uk/news/health-67100395 [Accessed: 29 March 2026].

Horn, P. (2023). The downward spiral [Digital image]. Medium, August. Available at: https://medium.com [Accessed: 29 March 2026].

Johnson, S.W. and Johnson, S.L. (2023). A review of the impact and evolution of the Affordable Care Act in America. International Journal of Scientific and Research Publications, 13(8), pp.25–29. doi:10.29322/ijsrp.13.08.2023.p14003.

Kelley. W.K. (2026), Asymmetric information is at the heart [Digital Image]

Mannemanna, C. (2025). Government intervention as a response to market failures in healthcare. International Journal of Science, Architecture, Technology and Environment, pp.540–544. doi:10.63680/ijsate1025054.056.

Propper, C. (2024). Socio-economic inequality in the distribution of health care in the UK. Oxford Open Economics, 3(Supplement_1), pp.i577–i581. doi:10.1093/ooec/odad090.

Tversky, A. and Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211(4481), pp.453–458. doi:10.1126/science.7455683.

 

Zeeb, H., Loss, J., Starke, D., Altgeld, T., Moebus, S., Geffert, K. and Gerhardus, A. (2025). Public health in Germany: structures, dynamics, and ways forward. The Lancet Public Health, 10(4). doi:10.1016/s2468-2667(25)00033-7.

 

Buy Now, Pay Later: The Hidden Cost of Splitting Reality

 

Figure 1: Buy Now, Pay Later (BNPL) concept

 

 

It’s 11:47 pm. You’re scrolling through an online store and spot a jacket for £200. It feels a bit expensive. Then you see the option to pay £50 today and split the rest over four months. Suddenly, it feels affordable and you click “buy.” Nothing about the price has changed, but the way it’s presented makes it easier to justify. Instead of thinking about the full £200, you focus on the £50 in front of you.

Figure 2 shows how this plays out over time. The dotted line represents what consumers feel they are paying, low at first, then rising. The solid line symbolises real cost: flat and unchanged from day one.The gap between them is where financial trouble starts.

Figure 2: Perceived vs Actual Cost over time under BNPL

 

The problem? This changes how we see cost and risk, leading to both individual debt and market failure.

In the UK, around 27% of adults have used Buy Now, Pay Later (BNPL) in the past year (Poll and Byrne, 2021, p.6). This shows how normalised this form of borrowing has become. BNPL works by shifting attention away from the total cost and towards the first instalment. This reflects present bias, where individuals place more weight on immediate payments than future ones. The £50 feels manageable, while the remaining payments are treated as less important. This can be explained by hyperbolic discounting (Laibson, 1997), where future costs are heavily discounted, leading consumers to judge affordability based only on the present.

In reality, this creates a gap between perceived affordability and actual financial commitment. Many users underestimate the risks, with 42% reporting that they did not fully understand what they were signing up for, and 2 in 5 users having used BNPL without even realising it (Poll and Byrne, 2021, p.3). As a result, payments can quickly build up. The report shows that 41% of users have struggled to make a repayment, while FCA evidence similarly highlights that many consumers do not fully understand the terms and risks of BNPL. This suggests that consumers are misjudging affordability and taking on financial obligations they cannot sustain. BNPL, therefore, does not reduce the cost of consumption; it changes how that cost is perceived, often leading to higher spending and financial strain.

The Information Gap: When 'Buy Now' Meets 'Pay Later'

This misperception is not accidental. It is rooted in a deeper economic problem: asymmetric information.

The core issue is that both sides are guessing. Unlike banks that run deep credit checks, BNPL providers approve most purchases in seconds with almost no background checks, creating an adverse selection problem. Risky borrowers are the very people attracted to BNPL services because other lenders have already said no. Meanwhile, people with excellent credit have little reason to use BNPL when their rewards credit cards offer better perks. Over time, this drives away the "good" customers and leaves BNPL platforms with borrowers who are more likely to default. This is a version of "lemons problem," described by George Akerlof in the used-car market: when buyers can't tell a good car from a bad one, the market gets flooded with bad cars, or "lemons".

At the same time, moral hazard creeps in on both sides. Consumers take more risks because a missed payment won’t immediately wreck their credit score. BNPL providers don't report most of these small loans to credit bureaus, traditional banks can't see how much BNPL debt a person is carrying. This means they can lend to someone who is already drowning in debt without other lenders knowing, and without  bearing the full cost if that borrower eventually collapses (Berg, 2025).

But the information gap isn't one-way. Many users misunderstand the penalties for missed payments or how quickly a small debt can snowball (Di Maggio et al., 2022). BNPL interfaces are designed to feel casual and low-stakes, not like a binding credit agreement. Regulators in Norway have even accused BNPL provider, klarna of hiding the true cost of borrowing (Norwegian Consumer Authority, 2022). In early 2025, Klarna's credit losses jumped 17% as more customers struggled to keep up (Chosunbiz, 2025), highlighting the risks created by information gaps and  the need for transparency.

 

Regulations and Recommendations

To address these issues, the Financial Conduct Authority (FCA) of the UK will start regulating BNPL deferred payment credit from July 15, 2026. Service providers must obtain FCA authorisation and conduct strict affordability checks to prevent irresponsible lending. At the same time, loan terms must be fully disclosed to reduce consumer misunderstandings (FCA, 2026-1).

 

Therefore, we suggest that regulators require all BNPL platforms to share users’ total debt information and present real total costs and repayment risks in a unified, clear format. This will enable platforms to assess a user’s overall indebtedness before offering new credit, and also allow consumers to understand the full financial obligation before purchasing (FCA, 2026-2).

 

These rules will bring greater transparency and fairness to the BNPL market and address market imbalances caused by information gaps.

 

 

Conclusion: Why This Matters

Present bias tricks you into focusing on the £50. Asymmetric information means BNPL doesn't know your true risk, and you don't know the true cost. Adverse selection brings risky borrowers to the front of the line. Moral hazard encourages carelessness on both sides. The lemons problem then drives good customers away.

These concepts don't exist in separate boxes. They feed into each other. A consumer with present bias takes on a BNPL plan they can't really afford. Because BNPL doesn’t run proper credit checks, they get approved anyway. Since BNPL doesn't share data with other lenders, no one sees the debt adding up. When that consumer misses a payment, their credit score stays intact, so they do it again.

The result is market failure. Resources are misallocated, debt rises, and consumers end up worse off than if BNPL had never existed. The FCA's 2026 rules and our suggested data-sharing requirement would help close the information gap. But the best protection is still the simplest. Next time you see "pay £50 today," pause and ask yourself: can I really afford £200?

References:

1.    Akerlof, G. A. (1970), The Market for 'Lemons': Quality Uncertainty and the Market Mechanism, Quarterly Journal of Economics, Vol. 84, No. 3, pp. 488-500
https://www.jstor.org/stable/1879431

2.    Berg, J. (2025), Klarna and Afterpay Keep BNPL Data From Credit Bureaus, PYMNTS.com, August 2025
https://www.pymnts.com/buy-now-pay-later/2025/klarna-afterpay-keep-bnpl-data-from-credit-bureaus/

3.    Chosunbiz (2025), Klarna's Credit Losses Jump 17% as BNPL Defaults Rise
https://biz.chosun.com/en/en-international/2026/02/20/BXF6RDDP4FB4FAZY7X25K5ZSWY/

4.    Davenport, Evans, Hurwitz & Smith, LLP (2024), Managing a Buy Now, Pay Later Loan Program, Davenport Evans

https://dehs.com/managing-a-buy-now-pay-later-loan-program/

5.    Di Maggio, M., Williams, E., & Kalda, A. (2022), Buy Now, Pay Later: Credit Supply, Consumer Demand, and Welfare, National Bureau of Economic Research (NBER) Working Paper No. 30535
https://www.nber.org/papers/w30535

6.    Financial Conduct Authority. (2026-1). Buy Now Pay Later. https://www.fca.org.uk/consumers/buy-now-pay-later

7.    Financial Conduct Authority. (2026-2). New protections confirmed for Buy Now Pay Later borrowers. https://www.fca.org.uk/news/press-releases/new-protections-confirmed-buy-now-pay-later-borrowers

8.    Laibson, D. (1997) ‘Golden Eggs and Hyperbolic Discounting’, The Quarterly Journal of Economics, 112(2), pp. 443–478. Available at: https://doi.org/10.1162/003355397555253.

9.    Norwegian Consumer Authority (2022), Klarna Criticized for Misleading Marketing and Hidden Costs
https://www.forbrukertilsynet.no/english/klarna/

10.                  Poll, H. and Byrne, G. (2021) Buy Now...Pain Later? Citizen’s Advice. Available at: https://assets.ctfassets.net/mfz4nbgura3g/1YG7ZltPP1JfBXDLfAIPgI/132a8617c04231d32eca733af7cdbcfe/BNPL_20report_20_FINAL_.pdf.

11.                  Protections to help Buy Now Pay Later borrowers navigate their financial lives (2025) FCA. Available at: https://www.fca.org.uk/news/press-releases/protections-help-buy-now-pay-later-borrowers-navigate-financial-lives. 

Airbnb’s Hidden Cost: Why Your Holiday Stay Raises Someone Else’s Rent

 “TOURIST GO HOME!”

This slogan can be widely seen on walls across cities such as Barcelona and New York (World Habitat, 2025). Behind it lies a growing frustration: while Airbnb easily provides cheaper stays and a more ‘local’ experience to foreign travellers, this comfort may push locals out of their own neighbourhood. So the question is no longer whether Airbnb is convenient – but who is paying for that convenience?

(Peter, 2017)

 

Why are tourists choosing Airbnb?

To understand the reason behind this phenomenon, we must start with a simple idea: preferences.

Nowadays, more and more travellers are moving away from traditional hotels in favour of experiencing local life. This allows them to immerse themselves in the neighbourhood, explore local cafes, and even cook at home. Airbnb, with a wide range of options, provides flexibility in letting people choose their “dreamed local home", like the number of bedrooms,  whether to have a kitchen or laundry facilities, and family-friendly equipment (Gibbs et al., 2018). More importantly, a friendly, more affordable price attracts many tourists who have few high-end travel options. This shift in consumer preferences is pushing travellers away from chains like Marriott or Hilton to local rentals. In Texas, each additional 10% increase in the size of the Airbnb market resulted in a 39% decrease in hotel room revenue (Zervas et al., 2017).

From a microeconomic perspective, these evolving preferences increase demand in the short-term rental market and drive up its profitability. Profit-seeking hosts will therefore change their properties from long-term tenants to Airbnb listings. From a report by Aline Cruvinel and Murray Cox (2026), in 92% of active countries, entire-home listings account for 82.4% of all listings, representing approximately 6.88 million housing units potentially removed from long-term residential use. This reallocation will reduce the supply of long-term leasing and contribute to a rising rent at a balance point in the market. Consequently, a traveller's seemingly simple decision can significantly impact the local housing market, affecting the availability of properties and the overall market conditions.

(Palomera, 2025)

 

No one pays for the hidden costs

However, the story doesn't end with changes in supply and demand.

The rise of Airbnb also brings a range of knock-on effects, the kind that don’t show up in prices but are still very real. Economists call these 'externalities', but in everyday terms, it just means that the choices of hosts and travellers end up affecting others without being reflected in the price.

A good place to see this is in the housing market. As more property owners realise they can earn higher returns through short-term rentals, many start moving away from long-term leasing, which leads to fewer homes available for the locals. With supply tightening, leasing fees begin to rise, and the trend is putting extra pressure on local tenants (Barron et al., 2021). Moreover, in many neighbourhoods, especially quiet residential ones, a steady flow of short-term guests can change the feel of the area. There may be more noise, more congestion, and less of a sense of community over time (Guttentag, 2015). These effects are challenging to measure, but they’re very real for the people who live there. While hosts and tourists benefit, locals may end up bearing the cost, both financially and otherwise.

From an economic perspective, this situation is a classic negative externality. The true cost to society, which economists call the marginal social cost (MSC), is higher than the cost faced by individual hosts (the marginal private cost, or MPC). That gap reflects things like reduced housing availability and the strain on residential areas. The absence of these costs in the price leads to a market with more short-term rentals than would be ideal for society (Figure 1).

Figure 1

 

That said, it wouldn’t be fair to paint Airbnb as entirely negative. There are upsides too. Visitors staying in local neighbourhoods often spend money at nearby cafés, restaurants, and small businesses, which boosts the local economy (Fang et al., 2016). These benefits ripple out beyond the host and guest, supporting communities in ways that aren’t directly reflected in rental prices. This is what economists would call a 'positive externality', where the wider benefits to society (marginal social benefit, MSB) are greater than the benefits captured by individuals (marginal private benefit, MPB).

All things considered, Airbnb is an excellent illustration of how real-world marketplaces are rarely flawless. Individual decisions may make sense on their own, but when you look more broadly, the final result may not necessarily be in everyone's best interests.

 

Can the government fix this?

When the market becomes uncontrollable, and a large number of housing properties shift from long-term to short-term rentals, the governments may step in to correct it. The objective of these policies is to reduce the hidden costs Airbnb makes without eliminating the benefits that the platform brings.

One effective policy is to impose a tax, such as a Pigouvian tax, on short-term rentals. This will shift external costs onto hosts and Airbnb users by increasing their costs (a process known as "internalisation" in economics), which will force some hosts to exit and enter the long-term leasing market to increase supply. Alternatively, governments can set annual caps on how many days a home can be rented out. The short-term rental activity is directly reduced by such quantity limits, which also contribute to an increase in the supply of long-term housing.

However, these policies come with trade-offs. Overly stringent regulations may lower income for hosts and leave them with limited options for travellers, reducing the efficiency of the market as a whole. Therefore, regulators need to strike a compromise between maintaining economic efficiency and correcting market failure

(Alegre, 2024)

 

 

Conclusion

The growth of Airbnb has revealed a clear conflict between private incentives and desirable social outcomes.

While it improves efficiency by matching supply to consumer demand, it simultaneously generates negative consequences by reducing long-term housing availability and snowballing rent prices. This highlights the case of market failure, where individually rational decisions lead to socially suboptimal outcomes.

Policy interventions, such as taxes or price limits, may help correct these distortions by internalising external costs, but they involve inevitable trade-offs for hosts and tourists. The key question, therefore, is not whether Airbnb is beneficial, but for whom and at what cost.

 

 

 

Reference list

1. Alegre, J. (2024). Barcelona Mayor Wants to Fix Housing Crisis by Banning Short-Term Tourist Rentals | The Deep Dive. [online] The Deep Dive. Available at: https://thedeepdive.ca/barcelona-mayor-wants-to-fix-housing-crisis-by-banning-short-term-tourist-rentals/ [Accessed 12 Apr. 2026].
2. Barron, K., Kung, E. and Proserpio, D. (2021) ‘The effect of home-sharing on house prices and rents: Evidence from Airbnb’, Marketing Science, 40(1), pp. 23–47.
3. Guttentag, D. (2015) ‘Airbnb: Disruptive innovation and the rise of an informal tourism accommodation sector’, Current Issues in Tourism, 18(12), pp. 1192–1217.
4. Fang, B., Ye, Q. and Law, R. (2016) ‘Effect of sharing economy on tourism industry employment’, Annals of Tourism Research, 57, pp. 264–267.
5. Gibbs, C., Guttentag, D., Gretzel, U., Morton, J., & Goodwill, A. (2018). Pricing in the sharing economy: a hedonic pricing model applied to Airbnb listings. Journal of Travel & Tourism Marketing, 35(1), 46–56.
6. Palomera, J. (2025). Barcelona and Madrid have very different ideas on tackling Spain’s housing crisis. Which will succeed? [online] The Guardian. Available at: https://www.theguardian.com/commentisfree/2025/dec/22/barcelona-madrid-different-ideas-tackling-spain-housing-crisis (Accessed 12 Apr. 2026).
7. Peter, L. (2017). ‘Tourists go home’: Leftists resist Spain’s influx. BBC News. [online] 5 Aug. Available at: https://www.bbc.co.uk/news/world-europe-40826257 (Accessed 12 Apr. 2026).
8. World Habitat (2025). The Airbnb Effect: short-term rentals with long-term consequences. Available at: https://world-habitat.org/blog/airbnb-and-the-housing-crisis/ (Accessed: 12 Apr. 2026).
9. Zervas, G., Proserpio, D. and Byers, J.W. (2017) ‘The rise of the sharing economy: Estimating the impact of Airbnb on the hotel industry’, Management Science, 63(4), pp. 1147–1162. doi: 10.1287/mnsc.2015.2380. 

The £30 Problem: How Dupes Are Rewriting the Rules of Luxury

 

Would you still feel cool in your designer outfit if everyone around you was wearing the dupe? While you are scrolling through TikTok, you may have noticed that influencers are racing to find less expensive, look-alike knockoff products from name brands. This is what Gen Z calls the “dupe culture”. They do not feel knockoffs are uncool. Instead, the viral spread of the “dupe culture” among Gen Z even makes them prefer knockoffs more than other generations, but it is not just an economic decision.

Signalling and Differential Costs

Try to think about why you would like top brand products even though they are expensive. A Hermès Birkin can cost £10,000, with an 18-month waitlist to get one. This phenomenon is known as Veblen goods, named after American economist Thorstein Veblen. Veblen argued that in a "leisure class," consuming expensive, non-essential goods is a way of displaying social power.  This seems reasonable, but how does a Hermès Birkin display social power?

Here, we have to introduce an economic concept of signalling, which refers to when one party acts to credibly convey private information to another party to overcome asymmetric information (Spence, 1973). In our example, the leisure class are the signallers who take the Hermès Birkin as a signal to show their social power to others who are the receivers.

Can a cheap and average bag be a suitable signal? The answer is no, as an important condition of a signal is that it only works if it has differential costs. In our example, the Hermès Birkin is a small amount of spending for a leisure class person, but expensive to an average person, so the high cost screens out the latter, as they cannot genuinely afford it. However, what if someone found a cheap and similar-looking “Hermès Birkin”?

When Everyone Can Signal, Nobody Can

So, what happens when a £30 AliExpress bag becomes indistinguishable from a £10,000 Birkin? The signal loses its informational value.

Global trade in counterfeit goods and imitation products has reached $467 billion (OECD, 2025), and on TikTok alone, the hashtag #dupe has amassed over 7 billion views. Dupe culture is not a niche trend, it is a mass market phenomenon.

In economic terms, this represents a shift from a separating equilibrium to a pooling equilibrium. In a healthy luxury market, consumers sort themselves based on their ability to bear the cost of the signal: those who can genuinely afford luxury goods (high-type senders) purchase them, while those who cannot (low-type senders) are screened out by price. However, when dupes collapse this cost differential, low-type senders can mimic high-type signals at minimal cost. The result is a pooling equilibrium: nobody can tell who is who anymore. The Birkin stops being proof of wealth and becomes just another bag.

Fighting Back: How Luxury Brands Are Raising the Bar

Luxury brands are not sitting still. Faced with a pooling equilibrium, they are actively redesigning signals to restore their credibility.

First, firms intensify exclusivity. By restricting supply through waitlists and controlled distribution, brands like Hermès ensure that access (not just price) becomes the barrier. Even if a product is copied, it cannot be legitimately obtained.

Second, brands invest in non-replicable experiences. Companies such as Louis Vuitton and Chanel embed value in in-store rituals, craftsmanship, and heritage narratives. The signal shifts from the physical object to the intangible experience surrounding it.

The third, and perhaps most interesting, is digital authentication. Luxury houses are increasingly adopting Digital Product Passports, embedded microchips and blockchain-backed certificates of authenticity that verify a product's origin instantly (FashionBI, 2025). LVMH, Prada and Cartier have already piloted this through the Aura Blockchain Consortium. The signal moves somewhere a £30 knockoff cannot follow.

In effect, luxury brands are engaged in an ongoing effort to re-establish a separating equilibrium in a world where visual imitation is no longer costly.

The psychology behind the price tag

Even if brands are successful in rebuilding their signals, the way buyers and owners perceive their products still plays a crucial role. But dupe culture does not just disrupt markets, it gets inside people's heads. To understand why, we need to look beyond standard economic theory and into behavioural economics.

One key concept is the endowment effect, which describes our tendency to value items we own more highly than their market price would suggest. A £3,000 bag is more than just a bag, once it is yours, the emotional pride and social status it carries become part of its value.

However, it is at this stage where dupe culture starts to undermine the psychological value of ownership too.

Imagine paying £10,000 and waiting 18 months for an Hermès Birkin, only to see near identical versions roaming the streets. That sense of pride and ‘showing off’ that comes with owning the authentic bag is eroded, as others can no longer distinguish the real from a convincing dupe. Both the bag and its owner lose a kind of celebrity status and instead you start to blend into the crowd filled with £30 lookalikes.

This reaction is best understood through loss aversion, the idea that losses feel more significant than gains (Kahneman and Tversky, 1979). In this case, buyers who paid thousands aren't just worried about the financial loss, but also the symbolic loss of exclusivity. What was once a costly way to access the perks of owning an authentic bag is now easily mirrored through dupes, which are able to send the same signals whilst saving thousands of pounds. Due to loss aversion, that loss of exclusivity feels far more costly than the satisfaction of owning an Hermès Birkin ever did.

In other words, dupes don't destroy the market for bags like the Hermès Birkin as there will always be demand for authenticity and exclusivity. Instead, they strip away the magic of owning one. Luxury brands and dupe culture are locked in an arms race, and whether the signal survives will determine whether that £10,000 bag is ever worth the price.

References:

FashionBI (2025). How Luxury Brands Are Embracing the Digital Product Passports. Available at: https://www.fashionbi.com/insights/how-luxury-brands-are-embracing-the-digital-product-passports

Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263–291. https://doi.org/10.2307/1914185

Ken Research (2025). Global Fast Fashion Market. Available at: https://www.kenresearch.com/global-fast-fashion-market

Mosendz, P. and Rubin, C. (2023). Gen Z Is the Dupe Generation. Business Insider. Available at: https://www.businessinsider.com/gen-z-is-the-dupe-generation-2023-12

OECD (2025). Global trade in fake goods reached USD 467 billion, posing risks to consumer safety and compromising intellectual property. Available at: https://www.oecd.org/en/about/news/press-releases/2025/05/global-trade-in-fake-goods-reached-USD-467-billion-posing-risks-to-consumer-safety-and-compromising-intellectual-property.html

Spence, M. (1973). Job Market Signaling. The Quarterly Journal of Economics, 87(3), 355–374. https://doi.org/10.2307/1882010

Trust Place (2025). Dupes on TikTok: How Brands Are Losing Control of Their Image. Available at: https://www.trust-place.com/post/dupes-on-tiktok-how-brands-are-losing-control-of-their-image