Imperfect Information

A third important market failure is imperfect information. The invisible-hand theory assumes that buyers and sellers have complete information about the goods and services they buy and sell, Firms are assumed to know about all the production functions for operating in their industry. Consumers are presumed to’ know about the quality and prices of goods-such as which cars are lemons or the safety and efficacy of pharmaceuticals and angioplasty.

Clearly, reality is far from this idealized world. The critical question is, How damaging are departures from perfect information? In some cases; the loss of efficiency is slight. I will hardly be greatly disadvantaged if I buy a chocolate ice cream that is slightly too sweet or if I don’t know the exact temperature of the beer that flows from the tap. In other cases, the Joss is severe. Take the case.of steel mogul Eben Byers, who a century ago took Radithor, sold as an aphrodisiac and cure-all, to relieve his ailments.
Later analysis showed that Radithor was actually distilled water laced with radium. Byers died a hideous death when his jaw and other bones disintegrated.

This kind ofinvisible hand we don’t need. One of the important tasks of the government is to identity those areas where informational deficiencies are economically significant such as drugs-and then to find appropriate remedies.

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