Week 7 Discussion 460 response: Go East, Young Marijuana Dealer

Week 7 Discussion 460 response

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Question: Read or listen to the NPR article: Go East, Young Marijuana Dealer (http://www.npr.org/sections/money/2013/05/22/185832919/go-east-young-marijuana-dealer)

What are some other example of markets with asymmetric information (legal or illegal)? How can these information asymmetries be resolved?

Answer: The most obvious example of asymmetrical information, and the one that the book references, is the used car market. This occurs when the seller has more information about the vehicle than the buyer, such as whether or not the car need repairs or has problems. Since the buyer doesn’t know, they pay more than the real value of the car. This results in adverse selection, as the buyer takes advantage of the asymmetric information to exercise immoral behavior before the transaction occurs. In an attempt to fix this problem, most states have what they call a Lemon Law. This gives the consumer the right to return the vehicle within a certain time period if they find that the product is not actually in the condition that they had believed it to be.

Another example of asymmetrical information can be found in the counterfeit designer clothing and handbag market. The buyer believes that they are purchasing an authentic item but the seller knows that it is a fake. One way to counter this example would be to only purchase from an authorized reseller.

The last example I’ll discuss today is the insurance industry. In this example it is the buyer that stands to gain from the asymmetry by withholding information. For example, a consumer of health insurance could withhold the fact that they are sick when purchasing insurance in order to receive coverage on a preexisting condition. A way to combat this deceit would be to mandate a physical and clean bill of health from a doctor before being accepted as a client.

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