Skip to main content

Asymmetric Information and the Rise of Fake News

In lecture, we explored the market for lemons and observed that when good cars and lemons are simultaneously on sale, consumers are willing to pay the average price between the two. This eventually generates market failure because the average price consumers are willing to pay is less than the price sellers of good cars are looking for to continue participating in the market. Thus, sellers of good cars will drop out of the market and only lemons will be available to consumers.

Asymmetric information is when one party possesses greater knowledge than the other party. This is clearly represented in the market for lemons, where sellers are aware of the true worth of the used cars but consumers are left in the dark. Thus, asymmetric information will distort the quality of goods available to the market and become a source for market failure.

Interestingly, the rise of fake news parallels the lemon dilemma in the market. True news stories are significantly more expensive to produce than fake ones, requiring extensive research, editors, and fact checkers. Similarly to the lemon market, there is also significant information asymmetry between the writer and the reader, where the writer is aware of the validity of an article and the reader is not. As a result, the news market is susceptible to the same market failure that dominates the lemon market – there is a strong implication that fake news could potentially drive out true news. Government regulation may be justified to fix this market failure, if not under the restrictions imposed by the First Amendment Doctrine.


Leave a Reply

Blogging Calendar

December 2016
« Nov   Mar »