2.8.7---2.10.3 common pool resources, asymmetric information

What are common pool resources?

• Definition: natural resources that are freely available for anyone to use, at zero price (ex. Oysters, fish)

• They are rivalrous and non excludable

Define rivalrous

Rivalrous: once this good has been consumed, it cannot be consumed by another person 

• Ex. if someone catches a fish, no one else can have it

Define non excludable

Non-excludable: not possible to exclude anyone from using it

• Ex. for common pool resources: they are non-excludable because they are free and can be used without payment

What is free market theory?

That all buyers/sellers are aware of all products are every price and have perfect information, leading to allocative efficiency

What is asymmetric information?

• Asymmetric information: when one party has better/more information than another

  • When this happens, markets are inefficient → consumers are not getting the max benefits, producers not getting max profit

  • In most cases, the producer has more information than consumer (as they charge a higher price)

Overallocation of resources

Underallocation of resources is due to _____ having more info than ____

Consumers, producers

Describe the 2 types of asymmetric information

Adverse selection

• When one participant has more info than the other before the transaction

• Ex. all you can eat buffet

  • If a customer already knows they can eat alot, taking advantage of the restaurant

Moral hazard

• One participant takes on more risky behaviour because they don’t pay the consequences for it

  • Occurs after the transaction

• Ex. drivers may take more risks after being insured

What are 3 government responses to asymmetric information? Also include pros/cons

• 1.  Legislation

  • Prevent incomplete sharing of information

  • Pros:

    • Cost effective

    • Improves transparency

  • Cons:

    • Government can change legislation

    • Can take time to enact

    • Subject to political debate

    • Needs to be enforced

• 2. Regulation

  • Monitoring industries by government agencies

  • Pros:

    • This is used to enforce legislation

    • Effective in taking accountability

  • Cons:

    • Expensive

    • Investigation takes time

    • Subject to political debate

    • Internal problems

• 3. Provision of information

  • The government directly shares information

  • Ex. publish videos/pamphlets

  • Pros: cheaper, allows consumers to make own decisions

  • Cons: may not be effective as direct intervention, carries opportunity cost

What are 2 private responses to asymmetric information? With pros/cons

1. Signalling

• For adverse selection: the party with more information can signal/communicate which “type” they belong to

• Ex. people could signal to the restaurant if they have big or small appetites

• Ex. employees can highlight their skills/qualifications on their resume to appeal to firms

• Pros: can be cost effective, increases amount of information available to all participants, improves market efficiency

• Cons: must be consequences for inaccurate information, takes time for the new information to be taken up

2. Screening

• The party without information needs to be able to cause the other party to reveal more information

• Mostly effective for adverse selection

• Ex. employers can insist that potential employees take qualifications before applying

• Pros: participant with less information is acting (may trust it more), increases amount of information available for everyone, improves market efficiency

• Cons: can still select the wrong participants

With asymmetric information _____ is lower due to uncertainty

Demand