Book contents
- Frontmatter
- Contents
- Preface
- 1 Introduction
- Part I Theory of the Consumer
- Part II Theory of the Producer
- Part III Partial Equilibrium Analysis: Market Structure
- Part IV General Equilibrium Analysis
- Part V Market Failure
- 17 Externalities
- 18 Public Goods
- 19 Uncertainty and Expected Utility
- 20 Uncertainty and Asymmetric Information
- Index
19 - Uncertainty and Expected Utility
from Part V - Market Failure
- Frontmatter
- Contents
- Preface
- 1 Introduction
- Part I Theory of the Consumer
- Part II Theory of the Producer
- Part III Partial Equilibrium Analysis: Market Structure
- Part IV General Equilibrium Analysis
- Part V Market Failure
- 17 Externalities
- 18 Public Goods
- 19 Uncertainty and Expected Utility
- 20 Uncertainty and Asymmetric Information
- Index
Summary
Introduction and Examples
In most of this book, we have assumed perfect information. That is, we have assumed that every buyer and every seller of every good and service in the market has complete information about all the relevant facts. All the buyers and all the sellers know the market prices, and they all know the characteristics of the things being bought and sold. This is a reasonable assumption in the markets for many goods, whose characteristics are easily observed. But it is often unreasonable. The following are some examples of things we buy and sell, or consume and pay for, whose properties or qualities may be quite uncertain. The buyers and sellers, or consumers and providers of these things, face substantial uncertainty or randomness.
1. Used cars. When you buy a used car, you are very unsure about its condition. You may bring it to an independent mechanic to check it over, and you may check it out on CarFax, but you can never be sure that the previous owner changed the oil any time in the last 25,000 miles. In other words, you might be lucky and get a beautifully maintained car with no mechanical problems, or you might get a lemon.
2. New cars. Of course you cannot be 100 percent sure about a new car either. Even if you are a thoughtful and careful consumer and you buy a Toyota Prius, you may have mechanical problems, perhaps even the much dreaded problem (in 2010, and probably exaggerated) of unintended acceleration.
[…]
- Type
- Chapter
- Information
- A Short Course in Intermediate Microeconomics with Calculus , pp. 346 - 358Publisher: Cambridge University PressPrint publication year: 2012