Rationales for public policy: market failures - Information asymmetry
3 important questions on Rationales for public policy: market failures - Information asymmetry
We have market failure due to information asymmetry when:
Economists have generally divided goods into three categories:
- Search good: consumers can determine its characteristics with certainty prior to purchase.
- Experience good: consumers can determine its characteristics only after purchase.
- Post-experience good: it is difficult for consumers to determine quality even after they have begun consumption.
Information asymmetry may lead to significant inefficiency for search goods if:
- Search costs are high relative to the expected purchase price
- the distribution of price and quality combinations is very heterogenous
- the frequency of purchase is relatively low
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