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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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