ch19 [Compatibility Mode] - 1 2 Informational Problems...

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1 Chapter 19 The Economics of Information 1 Lecturer: Yu Wang Informational Problems • Up until now, we have always assumed that everyone had the same information about the world. • This is not a realistic assumption 2 • 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 Information is 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 3 to permit the standard price-quantity characterization used in supply and demand analysis Properties of Information Studying information also becomes difficult due to some technical properties of information it is durable and retains alue after its use 4 it is durable and retains value after its use it can be nonrival and nonexclusive in this manner it can be considered a public good The 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 5 consequences of a particular action will be Better information can reduce uncertainty and lead to better decisions and higher utility The Value of Information Assume an individual forms subjective opinions about the probabilities of two states of the world “good times” (probability = ) and “bad times” 6 good 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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