Rationales for public policy: market failures - Information asymmetry
3 important questions on Rationales for public policy: market failures - Information asymmetry
We have market failure due to information asymmetry when:
the producer does not supply the amount of information that maximizes the difference between the reduction in deadweight loss and the cost of providing the information.
Economists have generally divided goods into three categories:
- Search good: consumers can determine its characteristics with certainty prior to purchase.
- Experience good: consumers can determine its characteristics only after purchase.
- Post-experience good: it is difficult for consumers to determine quality even after they have begun consumption.
Information asymmetry may lead to significant inefficiency for search goods if:
- Search costs are high relative to the expected purchase price
- the distribution of price and quality combinations is very heterogenous
- the frequency of purchase is relatively low
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