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14 Cards in this Set

  • Front
  • Back
Incomplete or Asymmetric Information
Sellers have more info than the buyers.
Examples: used cars, labor skills, T.V. info-commercials, airline safety…

Buyers have more info than the sellers.
Examples: health care, worker safety, antiques…

The market can over- or under-utilize in the face of incomplete information
Demand Example

Used Cars
Performance problems with the cars are not revealed to potential consumers.
Consumers pay too much for the products.
From the view of efficiency too much is consumed
Supply Example

Worker Safety
Health risks from producing butter-flavored micro-wave popcorn are not revealed to workers.
Workers will be under-compensated.
From the view of efficiency too much labor is supplied.
Role for Government
Markets were based on “caveat emptor” (buyer beware)
Now people demand regulation.

Government mandates consumer and worker safety through regulation.
Many government agencies define and enforce these regulations.
Examples: FDA, OSHA, CPSC, FTC, FDIC, FAA
The Federal Trade Commission Shuts Down Miss Cleo
Miss Cleo advertised FREE psychic readings

The ftc accused her of false promise of free readings, tricky billing tactics, and abusive telemarketing practices
How much regulation is efficient?
Individuals benefit from ensuring safety in consumer products, or working conditions.
However, there are substantial costs with attaining certain levels of safety
So, is it efficient to obtain 100% safety?
no, it is efficent to enact only the regulations that are more beneficial than costly

regulate till MB=MC
Markets for Regulation
Private regulation will form whenever customers perceive that government regulations are insufficient.
The private regulation will be profitable for firms if the market values the additional regulation over the cost of providing it.
Private regulation will increase the price of the regulated product.

Brand Names and Franchises provide incentive to ensure product quality.
Firms have to maintain reputation.
Markets for Regulation

Best Western
Owns no hotels, but allows hotels to use its logo (for a fee) if it meets its own quality standards.
Markets for Regulation

Underwriters Laboratories
private firm that establishes standards for electrical equipment and then tests equipment (for a fee) to see if it meets their standards.
Markets for Regulation

CARFAX.com
Provides information about a car’s history (for a fee).
Public Regulation

Don’t always consider
the cost of regulations
Public Regulation

Funded through
taxes paid by all individuals

ex. people that dont want to fly but pay taxes that go to the FAA
Public Regulation

Tend to respond to
only media scare