In what sense is information an economic good

From introductory courses in economic analysis we know that economic analysis is systematically concerned with the efficient use of the limited productive resources available to individuals who seek to maximise the satisfaction of their material and non-material needs. In the introductory analysis we assume that people seek to maximize their utility through the use of material goods and services and indeed the basic rule is that of Pareto. But to maximize the utility of individuals’ people make transactions in the market. To analyse these transactions, economists have developed models, such as those of perfect competition, in which they try to explain the interactions of market agents. Most of the analysis in microeconomics courses is based on the very important assumption that economic agents in the market have complete information about each other and about the goods and services in which they trade. This approach describes a market where there is perfect information, as Stiglitz (1993) points out.

One of the pioneering economists on these issues, Stigler (1961) had stated that “information is a valuable source of knowledge: knowledge is power” (p.213), and information can determine actions and operations such as buyers buying higher quality products at lower prices, when allocating their scarce available resources, or where government regulation of the environment e.g. can be much more effective when government agencies have good scientific information. Information can therefore be seen as a valuable economic good, particularly in terms of resource allocation. Indeed, under conditions of uncertainty, information can be crucial in determining the level of utility. What is wrong with assuming that there is perfect information in economic models is that economists do not reflect real situations in them. For example, households do not know the price of a good in all the stores that sell it, or firms do not know the actual productive capacities of a person applying for a job. Therefore, there is imperfect information in many markets and this may be because obtaining accurate information is expensive or impossible to obtain. The absence of information in a market transaction may be only on one side of the market or even on both sides (Stiglitz, 1993)(Varian, 1990). By asymmetric information we mean a situation in which the economic agents involved in a transaction have different information. For example, a seller of a used car has better information about the condition of the car than a potential buyer. A job applicant knows his qualifications better than the employer from whom he is seeking employment. The information shared between economic agents can be divided into two categories, the asymmetry that exists between the parties before a contract for a transaction is signed and the asymmetry that pis created after the contract for a transaction is signed. Both forms affect the behaviour of economic agents and market performance (Stiglitz,1993). Therefore, the two most famous forms of asymmetric information are the “adverse selection” and the “moral hazard”, issues that could be characterized as sub-cases of the more general problem known as the “principal-agent problem”.

References

Stigler, G.J. (1961) ‘The Economics of Information’, Journal of Political Economy, 69, p.213- 225.

Stiglitz, J.E.(1993) Economics. New York: W.W. Norton & Company.

Varian, H.R.(2014) Intermediate Microeconomics – A Modern Approach. 9th edn New York: W.W. Norton & Company.