In: Economics
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?
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.