Explain why imperfect information can lead to market failure. ...

[sjones]

Explain why imperfect information can lead to market failure. Explain how the market can solve the problem of imperfect information.
 
  Under what circumstances may it be more efficient for the government to produce information instead of relying on the market?

Question 2

Refer to Figure 19-6. Which of the following would cause the change depicted in the figure above?
 
  A) Dumping accusations result in the United States placing tariffs on produce imported from Mexico.
  B) An increase in investment in infrastructure causes U.S. productivity to rise relative to Mexican productivity.
  C) A declining preference for Kentucky bourbon causes Mexican consumers to decrease their preferences for U.S.-produced alcohol relative to Mexican-produced alcohol.
  D) A contractionary monetary policy causes a decrease in the price level of U.S. goods relative to Mexican goods.

[nekcihc358]

Answer to Question 1

If consumers have imperfect information they can make mistakes in purchasing decisions. If consumers are misinformed as to the quality of a product they may buy too little or too much of the product. The market can solve the problem of imperfect information by selling information and consumers should purchase information up to the point where the additional value of the information equals the additional cost of the information. Because information is essentially a public good it will be underproduced in the marketplace. It would be more efficient for the government to collect and disperse information when information is very costly for individuals to collect.

Answer to Question 2

C