After reading this chapter, you should be able to: Describe how information failures may justify government intervention in some markets; explain the difficulties of conveying economic preferences through majority voting; discuss government failure and explain why it happens.
17 AsymmetricInformation,Voting,andPublic Choice McGrawưHill/Irwin Copyrightâ2012byTheMcGrawưHillCompanies,Inc.Allrightsreserved InformationFailures 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 • • • LO1 Expensive Workers have adequate information • Avoid unsafe workplaces Asymmetric information • Firms have no incentive to improve workplace safety • Government sets safety standards 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 ... 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... buyers 1 7-6 Public Choice Theory • Majority voting systems • Difficult to correctly discern voter • LO2 preferences Hinders the ability of government to deliver what the voters want 1 7-7 Majority Voting... benefits LO3 1 7-8 Inefficient Voting Outcomes • • • • LO3 Public good beneficial (TB) > (TC) Inefficient “No” vote • TB > TC Inefficient “Yes” vote • TC > TB Interest groups and logrolling 1 7-9 Median Voter Model