Lecture 13 - MarketswithAsymmetric Information...

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Mercedes Miranda BE530 1 Markets with Asymmetric  Information
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2 1. Why Markets Fail? 2. Quality Uncertainty and the Market for Lemons 3. Market Signaling 4. Moral Hazard 5. The Principal–Agent Problem Lecture Outline
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3 Market Power Suppose that unions gave workers market power over the supply of their labor in the production of food. Too little labor would then be supplied to the food industry at too high a wage and too much labor to the clothing industry at too low a wage. In the clothing industry, the input efficiency conditions would be satisfied. In the food industry, the wage paid would be greater than the wage paid in the clothing industry. The result is input inefficiency because efficiency requires that the marginal rates of technical substitution be equal in the production of all goods. 1. Why Markets Fail
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4 Incomplete Information If consumers do not have accurate information about market prices or product quality, the market system will not operate efficiently. This lack of information may give producers an incentive to supply too much of some products and too little of others. In other cases, while some consumers may not buy a product even though they would benefit from doing so, others buy products that leave them worse off. asymmetric information: Situation in which a buyer and a seller possess different information about a transaction. Why Markets Fail
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5 Externalities Sometimes, however, market prices do not reflect the activities of either producers or consumers. There is an externality when a consumption or production activity has an indirect effect on other consumption or production activities that is not reflected directly in market prices. Why Markets Fail
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6 Public Goods Market failure arises when the market fails to supply goods that many consumers value. public good: Nonexclusive, nonrival good that can be made available cheaply but which, once available, is difficult to prevent others from consuming. Why Markets Fail
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7 2. Quality Uncertainty and the Market for Used Cars The Market for Used Cars Implications of Asymmetric Information Adverse Selection adverse selection: Form of market failure resulting when products of different qualities are sold at a single price because of asymmetric
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This note was uploaded on 07/15/2011 for the course ACC 360 taught by Professor Marshallhunt during the Spring '09 term at University of Michigan-Dearborn.

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Lecture 13 - MarketswithAsymmetric Information...

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