Information Shortages

Another market failure stems from the market’s inadequate provision of information. In general, the burden is on the consumers to do enough research to make the best decision they can when they are buying a product or service. In any given buying situation, there will naturally be a point at which consumers will quit shopping and make a purchase. There is always the possibility that they did not search long enough to find the best deal, but the added costs of searching for more information (which takes time and sometimes money) are not worth it. Economists say that in such situations, additional time spent searching brings rapidly diminishing returns. Once a reasonable number of options have been considered, a reasonable decision can be made without expending more time and energy discovering other options. It also follows that the greater the amount of the purchase, say for a car or a home, the more time an individual will spend researching and shopping before making a decision. In contrast, buying toothpaste may require no more “research” than scanning the shelf at the supermarket.

In most cases, most people find enough information to make good buying decisions. However, there are some circumstances under which the market will not provide the information consumers need to make good choices. For example, some sellers of goods and services, such as used car dealers or banks, may not voluntarily disclose important information about what they are selling. In such cases, the government often requires individuals or firms to provide detailed information about their products or services. The nutritional content labels on food packages, the disclosure notices on your credit card statements, and the “fine print” on loan applications are all sources of information that are required by the government. It is unlikely that this information would be routinely and voluntarily offered to consumers if the government did not require it.

Some observers have argued that onerous information disclosure requirements are too burdensome and costly and that they hurt both businesses and consumers. Others say that information is essential to an efficient and prosperous society and that the government should do all it can to encourage the availability and dissemination of the kinds of information consumers and citizens need to make good decisions.

One of the most problematic kinds of information failures stems from what economists call a “tragedy of the commons.” A “commons” is a publicly shared resource or area. The problem that often arises with the use of such resources or areas is that any one individual’s activities probably won’t severely deplete or damage the resource or area. However, when too many people use the resource or area too much, it can be devastated. That is the “tragedy.” In almost every case where a tragedy of the commons occurs, the people who depleted or damaged the “commons” would have altered their behavior if they had known what they were doing. Public information campaigns against littering are an example of government-sponsored efforts to alert people to a potential tragedy of the commons. In some cases, however, information is not enough, and limitations must be put on the use of certain places and resources. Examples of such regulations include limits on the number of fish you can catch in a particular river or lake or penalties and fines for littering or polluting an area.