1ECON1010
Introductory Microeconomics
LECTURE 12
Economics of Information
Q1. The clearest example of a good or service produced by
the private sector that has public good characteristics is:
b. education.
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e. bouncers at a nightclub.
d. MotoGP on Fox Sports (pay TV).
a. Weather report on the radio
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c. cars
Q2. A public good that would benefit Karen, Tammy and Max has
a one-time installation cost of $900. These three voters must
approve any tax plan by simple majority and all three will cast a
vote. Since the government does not know and cannot discover
the voters’ reservation prices, it proposes a head tax of $300 per
voter. The result of the referendum is:
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b. Max votes for the tax but Karen and Tammy
vote against it and it fails.
a. the tax passes and the public good is provided.
Voter Reservation
Price
Income
Karen $100 $1,000
Tammy $200 $5,000
Max $700 $6,000
c. Max votes for the tax, Karen votes against
it but Tammy’s vote is uncertain.
d. all three voters vote against the tax.
e. only Max casts a vote and the tax passes
Extra Question: Is the good
socially efficient Yes $1000 > $900
Lecture 12 – overview
Lecture 12 ECON1010 4
Another context where economists know competitive
markets can produce an inefficient outcome in the
presence of costly and / or imperfect information.
Economists know that perfectly competitive markets
may not produce efficient outcomes. The list of
situations where this is seen to occur continues to grow.
The model of perfect competition assumes that
buyers and sellers have perfect information, or at the
very least are “well informed”.
What happens when this assumption doesn’t apply
in the real world
In reality then:
The invisible hand theory assumes buyers are
fully informed, but this is rarely true.
Some market signals are false and misleading.
Given that consumers are not fully informed,
they must employ strategies for gathering
information.
Gathering the optimal amount of information
Having more information is better than less, but
more information is costly to acquire.
There can be rising marginal costs associated with
collecting information and diminishing returns.
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Cost-benefit principle indicates a rational consumer
will continue gathering information as long as
marginal benefit exceeds the marginal cost.
2The optimal amount of information.
M
B,
M
C
