L25 - Road map 1) Consumers choice L25 Asymmetric...

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1 L25 Asymmetric Information Road map 1) Consumers choice 2) Equilibrium, Producers (Pareto efficiency) 3) Market Failures - fixed cost: monopoly and oligopoly - externalities and public goods - asymmetric information Asymmetric Information ± Assumption: full information about the traded commodities ± What about following markets? 1. Medical services: a doctor knows more than does the buyer. 2. Insurance: buyer knows more about his riskiness than does the seller. 3. Used cars: a car’s owner knows more about it than does a potential buyer ± Problem: asymmetric information Today ± Q: how does asymmetric information affect the functioning of a market? ± Important phenomena 0 adverse selection (hidden information) 0 signaling 0 moral hazard (hidden action)
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2 Market for “lemons” ± Second hand car market. ± Types of cars: “lemons” and “plums”. ± Car value ± Benchmark: Perfect information ± Gains-to-Trade 2400 1200 Buyer 2000 1000 Seller Plum Lemon Asymmetric information ± Asymmetric information (50% - 50%) 2400 1200 Buyer 2000 1000
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This note was uploaded on 06/04/2011 for the course ECON 301 taught by Professor Hansen during the Spring '08 term at Wisconsin.

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L25 - Road map 1) Consumers choice L25 Asymmetric...

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