Market Inefficiency
Market Inefficiency
Market inefficiency occurs when current prices of securities and stock don’t reflect the publicly available demand and supply information. This can happen because information isn’t properly analyzed, or people just don’t have the right information.
O’Sullivan (2012) gives used cars as an example of market inefficiency. You could have two vehicles that are the same make and model with the same features and miles on them. The cars would both be priced the same, but what you can’t see is that one of the cars’ intake manifold gasket needs to be replaced. Shortly after you purchase the car, you will need to spend an extra $1,000 dollars on it to fix what’s broken. This happens because you weren’t properly informed, and you didn’t seek out the information, by having another mechanic look at the car before you purchased it.
This is called asymmetric information. In this situation, the seller has better information than the buyer and the seller uses that information to their advantage. Other sources of market inefficiencies are public goods, such as street lights and roads, income distribution, monopolies and their misuse of market power, and externalities which occur when an activity confers a benefit or a cost on a third party without it being included in the market price of the activity. The best way to deal with the asymmetric information in the car situation is to take it upon yourself to be informed. It is the car salesman’s job to sell you the car, not to let you know all the little things that could be wrong with it. You have to do your homework. Find a good car mechanic that can take a look at the car before you purchase it. The little amount of money that would it would cost is a good investment for the future of that car.
It makes sense for the government to interfere when it comes to pollution. It has very negative external benefits. Pollution can have a very negative affect on our society. It makes our air foggy, it’s bad for our
Market inefficiency occurs when current prices of securities and stock don’t reflect the publicly available demand and supply information. This can happen because information isn’t properly analyzed, or people just don’t have the right information.
O’Sullivan (2012) gives used cars as an example of market inefficiency. You could have two vehicles that are the same make and model with the same features and miles on them. The cars would both be priced the same, but what you can’t see is that one of the cars’ intake manifold gasket needs to be replaced. Shortly after you purchase the car, you will need to spend an extra $1,000 dollars on it to fix what’s broken. This happens because you weren’t properly informed, and you didn’t seek out the information, by having another mechanic look at the car before you purchased it.
This is called asymmetric information. In this situation, the seller has better information than the buyer and the seller uses that information to their advantage. Other sources of market inefficiencies are public goods, such as street lights and roads, income distribution, monopolies and their misuse of market power, and externalities which occur when an activity confers a benefit or a cost on a third party without it being included in the market price of the activity. The best way to deal with the asymmetric information in the car situation is to take it upon yourself to be informed. It is the car salesman’s job to sell you the car, not to let you know all the little things that could be wrong with it. You have to do your homework. Find a good car mechanic that can take a look at the car before you purchase it. The little amount of money that would it would cost is a good investment for the future of that car.
It makes sense for the government to interfere when it comes to pollution. It has very negative external benefits. Pollution can have a very negative affect on our society. It makes our air foggy, it’s bad for our
References: Illinois Environmental Protection Agency. (2012, July 25). Questions about vehicle emissions testing. Retrieved from http://www.epa.state.il.us/air/vim/faq/testing.html O 'Sullivan, A., Sheffrin, S., Perez, S. (2012). Survey of economics. Boston, MA: Pearson Prentice Hall