G202

Front 1

Incomplete or Asymmetric Information

Back 1

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

Front 2

Demand Example

Used Cars

Back 2

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

Front 3

Supply Example

Worker Safety

Back 3

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.

Front 4

Role for Government

Back 4

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

Front 5

The Federal Trade Commission Shuts Down Miss Cleo

Back 5

Miss Cleo advertised FREE psychic readings

The ftc accused her of false promise of free readings, tricky billing tactics, and abusive telemarketing practices

Front 6

How much regulation is efficient?

Back 6

Individuals benefit from ensuring safety in consumer products, or working conditions.
However, there are substantial costs with attaining certain levels of safety

Front 7

So, is it efficient to obtain 100% safety?

Back 7

no, it is efficent to enact only the regulations that are more beneficial than costly

regulate till MB=MC

Front 8

Markets for Regulation

Back 8

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.

Front 9

Markets for Regulation

Best Western

Back 9

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

Front 10

Markets for Regulation

Underwriters Laboratories

Back 10

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

Front 11

Markets for Regulation

CARFAX.com

Back 11

Provides information about a car’s history (for a fee).

Front 12

Public Regulation

Don’t always consider

Back 12

the cost of regulations

Front 13

Public Regulation

Funded through

Back 13

taxes paid by all individuals

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

Front 14

Public Regulation

Tend to respond to

Back 14

only media scare