He implications of asymmetric information for the function of markets Essay

He implications of asymmetric information for the function of markets at both the microeconomic and macroeconomic levels - Essay Example The situation where the market produces more or less than the ideal or the optimal amount of a particular good, it is regarded as the market failure in terms of economics There are several factors that results in the market failure like externalities and monopoly power, and asymmetric information.Еhe implications of asymmetric information for the function of markets at both the microeconomic and macroeconomic levels.In an analysis of the competitive market structure it is always assumed that the buyers and the sellers have perfect knowledge about the market. But in reality this does not happens. When the available information about any product is more with someone than the others then the arisen situation is of market failure and the phenomenon is termed as â€Å"asymmetric information†. The information about the product is an important factor and if the quality of the goods could be judged about whether it being excellent or inferior then the price would have adjusted acc ording to the quality differences. Asymmetry and Market failure and the need of the government intervention A. Market failure and the used car market The situation of information asymmetry leading to market failure is best understood by the example of used cars. In a transaction of a used car, a seller would always know more than the buyer. Considering a case of a second hand Chevrolet Malibu which would cost $15,000 in an ‘average’ condition, if the condition of the car is ‘excellent’, that would cost $18,000 and if the condition of the car is ‘poor’, the car will be priced at $12,000.... without any excellent car will be ready to pay not more than $13500 that is the average price of the cars, which are either in average or poor condition. This in turn will prevent the average car owners from offering their car at such a low price. So at the end the market forces will adjust itself to equilibrium for the poor cars at the selling price of $12000. This is an example of market failure where the market for the excellent and average cars does not exist due to the asymmetry of information. This is a situation of quality uncertainties where the high quality goods are driven out by the low quality goods. (Chauhan, n. d, pp. 224-225) This is explained with the help of a diagram: PH SH P E P’ E’ DH DH’ DH† 0 Q’ Q Figure 1 (a) PL p’ e' SL p e DL’ DL 0 q q’ Figure 1(b) Source: Chauhan, n. d, pp. 224-225 In the diagram Figure 1 (a) DH represents the demand for high quality goods, SH, the supply for high quality goods. They int ersect at the point E where the quantity OQ must be demanded and it must be supplied at OP price. Due to the asymmetry of information, the same amount OQ is demanded at a lower price E†. As the buyers are uncertain about the quality of the product they treat the high quality good as the low quality good and hence the demand curve shifts downwards to DH’. At this lower price some of the seller refuses to sell the product which causes the supply to fall from OQ to OQ’. Hence the new equilibrium is at E’, where the DH’ intersects S H. The OQ amount of high quality goods is sold at a price OP’.As there exists quality uncertainty the demand curve is expected to further slide down to DH† which does not intersect with the supply curve SH at all. This shows how the market for high quality goods fails. In the figure 1(b),

A Case Examination of Policy for Natural Resource Management Essay

A Case Examination of Policy for Natural Resource Management - Essay Example In terms of public sentiment it’s understood that there is substantial public divide in regards to zoning considerations. The older residents of the town generally reject increased zoning and public policy measures, while the newer residents have sought a more structured policy. Adding to the dilemma are two major land use considerations; namely, the land areas in question contribute in substantial ways to the Albany metropolitan region’s water supply, and an impact on the surrounding natural habitat. In addition to these natural concerns, there are concerns related to changes in the social environment and increased need for infrastructure to meet the demands of development. One of the notable features of the public community is that while older and newer residents disagree on the extent of public control the land should be under, they both are in agreement in regards to the sorts of preservation that should occur. In these regards, the question becomes more one of gove rnmental control than it does of disagreements over the types of measures that should be enacted. Even as the older residents oppose government policy measures, it’s clear that they must be enacted; as such, the following policies represent a compromise between desires for land control and the need for regulatory measures. Zoning In terms of zoning there are a number of concerns that must be addressed when deciding on a course of action. The most overarching concern is the balance that must be achieved between land-use and water supply. This policy reports recommends that a comprehensive investigation be made into the proportion of land use and water supply that is necessary for the adjoining reservoir. In developing a suitable compromise between old and new residents a zoning policy were be enacted with different regulations for current and future residents. Upon determining these figures, zoning will be determined along a proportion system. In these regards, there will be established a policy that balances resident seniority and land size, with zoning policy. Transfer and Purchase of Development Rights; Land Trusts; Differential Property Taxation While current landowners will experience a proportionate allotment of land-use within the specified figures, the transfer and purchase of development right s to future owners will be given increased restrictions. In these regards, individuals seeking to purchase development rights for recreational procedures will only be able to do so within the boundaries of the proportionate measures. Current land owners seeking to transfer development rights to outside parties will need to do so within the proportionate standards that are established by the water supply statistics. This will ensure that the base land needs for the adjoining reservoir will never be circumvented through increased land use. Another major concern of current residents was maintaining the current social climate, as well as the increased infrastructure needs brought on by the new residents. As a means of addressing these concerns it’s recommended that the regional authority institute differential property taxation. In these regards, outside of the proportional restrictions put in place for the adjoining reservoir, there will be no zoning that restricts the developme nt of a specific type of use. However, the regional authority will institute a quarterly tax rate that is designed to regulate the transfer, purchase, and development of property. It is understood that increased taxation on recreational land use will slow down development in this zone. This will ensure that a steady social climate is maintained and that the region has the funding to support increased infrast