Solutions to solve asymmetric information
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We talked about asymmetric information and how to find equilibria in markets with asymmetric information in class, using the examples of markets of lemons, used cars, and health insurance. However, in some equilibria, we can see that either buyers or sellers may suffer loss due to asymmetric information. Take the market of used cars for example, we have the following values of good cars and bad cars for buyers and sellers, and only sellers know the quality of the cars. Good cars worth 16 to buyers and 12 to sellers and bad cars worth 10 to buyers and 5 to sellers. We calculated in class that one of the equilibria will be buyers expect all cars to be sold and they will pay 13 for the cars. However, the bad cars only worth 10 to the buyers, who paid 13 for each of the bad cars because they did not know the quality of each individual car. The same situation may happen for sellers in the health insurance market. Therefore, it is important to avoid asymmetric information so that social benefit can be maximized.
The article talked about several strategies that can be used to reduce asymmetric information. First is to improve the availability of information so that both consumers and producers can learn more about the product before making decisions. The ingredient list on the packages is one example. The second solution is giving warranties or guarantees as a form of ensuring the quality of the products so that consumers can purchase with fewer concerns. Imposing taxes or subsidies is also recommended since they are both forms of government intervention to protect the market. Setting industrial standards is also a way to ensure information flow between producers and consumers. Giving license and setting laws is similar to have industrial standards, but it enforces from the perspective of laws.