Overview: Information and Risk

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Economists have argued since Adam Smith that markets tend to be efficient, that the "invisible hand" works. However, they have discovered that the conditions needed for a whole economy to be economically efficient are so restrictive that they will not in practice happen. All buyers and sellers must be price takers. Information must be good and equally available to buyers and sellers. Private-property rights must exist and be complete. When these assumptions are not satisfied, the market can fail to allocate efficiently.

This group of readings considers the problems an exchange economy has when there is poor information, unequal information, or risk. These problems yield unintended consequences that are important in the way economists view an exchange economy.

After you complete this unit, you should be able to:

  • Define and give examples of screening, signaling, speculation, arbitrage, hedging, entrepreneur, moral hazard.
Copyright Robert Schenk