Markets and Information
Markets and information At the center of the idea that markets generate efficient allocations of resources is the problem of information. This is a simple point, embodied in jokes about used car salesmen describing vehicles as having been driven by little old ladies only on Sundays and aphorisms such as “buyers beware.” Basically the problem is that sellers on a market have strong interests in hiding certain kinds of information from buyers in contexts in which it is costly, if not impossible, for buyers to get the necessary information to make an optimal choice. Because of this severe information problem we have laws that regulate false advertising, and we require firms to provide certain kinds of information to consumers which they would not provide if there was a perfectly free market. Food labeling is a good example. Laws that require nutrition information on food violate the free market. Food processors would not provide this information unless forced to do so. It costs the seller something to calculate nutritional content, assemble the data, and put this on a label. Individual consumers are unlikely to have strong preferences about this information until after it is provided. And furthermore, even if there were some consumers who wanted the information, it would initially be quite costly for producers to provide this information – there are considerable economies of scale in providing the information if it is done on a wide scale rather than on a limited scale – and thus the price difference between products with and without product information would be prohibitive.
