17 Asymmetric Information, Voting, and Public Choice McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

LO1 Information Failures Asymmetric Information Market failure Incomplete information for buyers or sellers Better information is too costly 17-2

Inadequate Information LO1 Inadequate Buyer Information on Sellers Inadequate Seller Information on Buyers Causes underallocation of resources Gasoline marketMoral Hazard Licensing of surgeonsHeavy costs on insurers 17-3

LO1 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 17-4

LO1 Workplace Safety Expensive Workers have adequate information Avoid unsafe workplaces Asymmetric information Firms have no incentive to improve workplace safety Government sets safety standards 17-5

LO1 Qualification: Asymmetric Information Government intervention is not always necessary Firms offer product warranties Franchisers provide a known product Private firms provide product information to buyers 17-6

LO2 Public Choice Theory Majority voting systems Difficult to correctly discern voter preferences Hinders the ability of government to deliver what the voters want 17-7

LO3 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 17-8

LO3 Inefficient Voting Outcomes Public good beneficial (TB) > (TC) Inefficient “No” vote TB > TC Inefficient “Yes” vote TC > TB Interest groups and logrolling 17-9

LO2 Median Voter Model 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

LO3 Government Failure Inefficient outcomes caused by government Voting problems Principal-agent problem Special-interest effect Rent seeking behavior 17-11

LO3 Clear Benefits, Hidden Costs 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

LO3 Global Perspective 17-13