17
Asymmetric Information, Voting, and Public
Choice
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Information Failures
•
LO1
Asymmetric Information
• Market failure
• Incomplete information for
buyers or sellers
• Better information is too costly
17-2
Inadequate Information
Inadequate Buyer Information
on Sellers
Inadequate Seller Information
on Buyers
Causes underallocation of resources Causes underallocation of
resources
LO1
Gasoline market
Moral Hazard
Licensing of surgeons
Heavy costs on insurers
17-3
Adverse Selection Problem
Adverse selection defined:
• Second party incurs major costs due
to lack of information
• Adverse selection happens at the time
the contract is signed
• Prevents pooling of low and high risks
• Eliminate adverse selection by
government requiring social insurance
LO1
17-4
Workplace Safety
• Expensive
• Workers have adequate information
• Avoid unsafe workplaces
• Asymmetric information
• Firms have no incentive to improve
workplace safety
• Government sets safety standards
LO1
17-5
Qualification: Asymmetric Information
•
•
•
•
LO1
Government intervention is not
always necessary
Firms offer product warranties
Franchisers provide a known
product
Private firms provide product
information to buyers
17-6
Public Choice Theory
• Majority voting systems
• Difficult to correctly discern voter
•
LO2
preferences
Hinders the ability of government
to deliver what the voters want
17-7
Majority Voting
• Determines the size and scope of
government involvement in the
economy
• Reveals preferences
• Results can be inconsistent and
imperfect due to:
• Presentation order of the choices
• Distribution of the costs vs. benefits
LO3
17-8
Inefficient Voting Outcomes
•
•
•
•
LO3
Public good beneficial (TB) > (TC)
Inefficient “No” vote
• TB > TC
Inefficient “Yes” vote
• TC > TB
Interest groups and logrolling
17-9
Median Voter Model
•
•
LO2
Median voter preference will
determine size of government
Implications
• Many voters are dissatisfied with
size of government
• Voters move where preferences
are closer to theirs
17-10
Government Failure
• Inefficient outcomes caused by
government
• Voting problems
• Principal-agent problem
• Special-interest effect
• Rent seeking behavior
LO3
17-11
Clear Benefits, Hidden Costs
•
•
•
•
LO3
Limited and bundled choices
• Citizen has only two choices
for candidates for election
Bureaucracy and Inefficiency
• Public agencies are less
efficient than private business
Corruption: accept a bribe
Imperfect institutions: healthcare
17-12
Global Perspective
LO3
17-13