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FRONTIERS OF
22 MICROECONOMICS
WHAT’ S NEW IN THEEVENTHS EDITION:
A new Case Study on Left-Digit Bias has been added and a new In the News feature on Can Brain Science Improve Economics has been added.
LEARNING OBJECTIVES:
By the end of this chapter, students should understand:
how to examine problems caused by asymmetric information.
the market solutions to asymmetric information.
why democratic voting systems may not represent the preferences of society.
why people may not always behave as rational maximizers.
CONTEXT AND PURPOSE:
Chapter 22 is the last chapter in the microeconomics portion of the text. It is the second of two unrelated chapters that introduce students to advanced topics in microeconomics. These two chapters are intended to whet their appetites for further study in economics.
The purpose of Chapter 22 is to give students a taste of three topics on the frontier of microeconomic research. The first topic addressed is asymmetric information , a situation when one person in an economic relationship has
more relevant knowledge than the other person does. The second topic is political economy , the application of economic tools to the understanding of the functioning of government. The third topic addressed is behavioral economics , the introduction of psychology into the study of economic issues.
KEY POINTS:
In many economic transactions, information is asymmetric. When there are hidden actions, principals may be concerned that agents suffer from the problem of moral hazard. When there are hidden characteristics, buyers may be concerned about the problem of adverse selection among the sellers. Private markets sometimes deal with asymmetric information with signaling and screening.
Although government policy can sometimes improve market outcomes, governments are themselves imperfect institutions. The Condorcet paradox shows that the majority rule fails to produce transitive preferences for society, and Arrows impossibility theorem shows that no voting
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