Will fail to produce nonexcludable public goods or at

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will fail to produce nonexcludable public goods or at least fail to produce them at a desired level. The market will not produce nonexcludable public goods. The door then is opened to government involvement in the production of these nonexcludable public goods. Side note: A government-provided good is not the same as a nonexcludable public good. In some instances, a government-provided good is a nonexcludable public good, such as when the government furnishes national defense. However, the government furnishes mail delivery and education, two goods that are also provided privately and are excludable and thus not subject to free riding. Nonexcludable Versus Nonrivalrous A good can be rivalrous or nonrivalrous in consumption and still be produced in the market. However, if a good is not excludable the market will not produce it. 17-5 ASYMMETRIC INFORMATION In case of nonexcludable public goods, the market produces zero output. Asymmetric information (possible cause for market failure) is information that either the buyer or the seller in a market exchange has and that the other does not have. In other words, some information is hidden. Ex. The seller of a house may have information about the house that the buyer does not have, such as that the roof leaks during heavy rainfall. The quantity consumed of a good is likely to be higher when there is asymmetric information than if there is symmetric information. Asymmetric Information in a Product Market The demand curve represents marginal private benefits (MPB) and the supply curve represents marginal private costs (MPC). Is There Market Failure? Certainly, the output level of a good and the quantity of labor were lower with symmetric information than with asymmetric information. The presence of asymmetric information does not guarantee that the market fails. What matters is that the asymmetric information brings about a different outcome S = MPC D1 = MPB1 (Asymmetric info) D2 =MPB2 (Symmetric info) Q2 Output Symmetric info Q1 Output Asymmetric info
than if there were symmetric information, then the case for market failure can be made. Adverse Selection Adverse Selection: exists when the parties on one side of the market, who have information not known to others, self-select in a way that adversely affects the parties on the other side of the market. Ex. Owners of lemons offer their cars for sale; they select to sell their cars because they know (and only they know) that the average price they are being offered for their below-average cars is a good deal. Through adverse selection the supply of lemons on the market will rise, and the supply of high quality, or good, used cars will fall. Theoretically, adverse selection can lead to the total elimination of the good. In other words, lemons will drive all the good cars out of the market. In some cases, government has played a role in dealing with adverse selection problems. Adverse selection can lead to missing or incomplete markets. Moral Hazard Asymmetric information can also exist AFTER a transaction has been made. If it

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