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1Chapter 19 The Economics of Information1Lecturer: Yu WangInformational Problems• Up until now, we have always assumed that everyone had the same information about the world. • This is not a realistic assumption2• This is not a realistic assumption. • Today we will explore how informational problems can cause inefficiencies in markets, and how these problems can be overcome. Properties of Information•Informationis not easy to define▫it is difficult to measure the quantity of information obtainable from different actions▫there are too many forms of useful information 3to permit the standard price-quantity characterization used in supply and demand analysisProperties of Information•Studying information also becomes difficult due to some technical properties of informationit is durable and retains alue after its use4▫it is durable and retains value after its use▫it can be nonrival and nonexclusivein this manner it can be considered a public goodThe Value of Information•In many respects, lack of information does represent a problem involving uncertainty for a decision maker▫the individual may not know exactly what the 5consequences of a particular action will be•Better information can reduce uncertainty and lead to better decisions and higher utilityThe Value of Information•Assume an individual forms subjective opinions about the probabilities of two states of the world▫“good times” (probability = ) and “bad times” 6good times(probability = g) and bad times (probability = b)•Information is valuable because it helps the individual revise his estimates of these probabilities
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