Question

In: Economics

The following questions all concern information asymmetry: a. Use a diagram to illustrate the deadweight loss...

The following questions all concern information asymmetry:
a. Use a diagram to illustrate the deadweight loss that, in the absence of government
intervention, results from information asymmetry.
b. Briefly describe a government policy that can partially or entirely eliminate the deadweight
loss resulting from information asymmetry.
c. Should all information asymmetry problems be eliminated through government
intervention? If not, on what types of information asymmetry should the government focus?
Briefly explain?

Solutions

Expert Solution

A) Deadweight loss implies loss in economic efficiency when socially optimal level of production does not take place in the economy. In the absence of government intervention asymmetric information can cause market failure due to adverse selection or moral hazard.
Information asymmetry can occur on the consumer side when consumers do not have the complete information and that is misused by the producers to produce less than optimum level of output. Information asymmetry can lead to less than optimal allocation of resources and market failure.

B) Government policy to curb monopoly markets is one example where government policy helps eliminate deadweight loss since preventing a monopoly market helps market priduce socially optimum level or competitive level of output it almost completely eliminates deadweight loss.
So taxes, subsides abd government regulations are some tools meant for preventing deadweight loss due to information asymmetry

C) No all information asymmetry should not be solved by government intervention since government intervention can cause market failure too so government intervention should only be considered when market failure happrns bd markets are not able to self correct.


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