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 adesired level.The market will not produce nonexcludable public goods. The door then is openedto government involvement in the production of these nonexcludable public goods.Side note: A government-provided good is not the same as a nonexcludable publicgood. In some instances, a government-provided good is a nonexcludable publicgood, such as when the government furnishes national defense. However, thegovernment furnishes mail delivery and education, two goods that are also providedprivately and are excludable and thus not subject to free riding.Nonexcludable Versus NonrivalrousA good can be rivalrous or nonrivalrous in consumption and still be produced in themarket. However, if a good is not excludable the market will not produce it.17-5 ASYMMETRIC INFORMATIONIn case of nonexcludable public goods, the market produces zero output.Asymmetric information (possible cause for market failure) is information thateither the buyer or the seller in a market exchange has and that the other does nothave. In other words, some information is hidden.Ex. The seller of a house may have information about the house that the buyer doesnot have, such as that the roof leaks during heavy rainfall.The quantity consumed of a good is likely to be higher when there is asymmetricinformation than if there is symmetric information.Asymmetric Information in a Product MarketThe demand curve represents marginal private benefits (MPB) and the supply curverepresents marginal private costs (MPC).Is There Market Failure?Certainly, the output level of a good and the quantity of labor were lower withsymmetric 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 outcomeS= MPCD1= MPB1(Asymmetric info)D2=MPB2(Symmetric info)Q2OutputSymmetricinfoQ1OutputAsymmetricinfo
than if there were symmetric information, then the case for market failure can bemade.Adverse SelectionAdverse Selection: exists when the parties on one side of the market, who haveinformation not known to others, self-select in a way that adversely affects theparties on the other side of the market.Ex. Owners of lemons offer their cars for sale; they select to sell their cars becausethey know (and only they know) that the average price they are being offered fortheir below-average cars is a good deal.Throughadverse selectionthe supply of lemons on the market will rise, and thesupply of high quality, or good, used cars will fall.Theoretically,adverse selectioncan lead to the total elimination of the good. In otherwords, lemons will drive all the good cars out of the market.In some cases, government has played a role in dealing with adverse selectionproblems. Adverse selection can lead to missing or incomplete markets.Moral HazardAsymmetric information can also exist AFTER a transaction has been made. If it

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Term
Fall
Professor
Nuchereno

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