The world runs on information, all kinds of information. The economic analysis of all information is known as Information Economics, just as its name suggests. All the information you and I have and also don’t have been analyzed for economic purposes. Therefore, Information Economics, a branch of microeconomics, picks out different kinds of information, differentiates between them, and relates them to the economy, points out problems and looks for their solutions.
Fundamentals of Economics
Economics is fundamentally about solving the problem of scarcity- limited resources but unlimited wants. This problem leads to consumers having to make a choice because they do not have enough resources to satisfy all their wants. Another thing that consumers take into account is utility, which in simpler words can be known as satisfaction. Consumers will choose the product that gives them the highest level of satisfaction. Now, to make that choice, the person needs to know about the product to know if it is possible to afford it and also if it gives the highest level of satisfaction. Information Economics is basically all about that- information necessary to get to the highest utility, information about the product such as price, and how the decision made with this information affects the economy, this is why Information Economics is important.
An Economy reaches allocative efficiency when the demand and supply curves meet. The corresponding quantity of that intersection point is the allocative efficient quantity. However, in a market economy, it is rarely the case. In these economies, a market failure occurs due to the overproduction of demerit goods or underproduction of merit goods. The main reason behind this is asymmetric information. Definition of asymmetric information can be said to be insufficient information, simply put, or information failure. Merit goods are goods that are good for people, and demerit goods are bad for people, just as the names suggest. However, most people do not know that it is good for the;m therefore under consume merit and overconsume demerit goods. This then leads to the under or overproduction.
As said earlier, Information Economics picks out problems and looks for its solution. Therefore, this asymmetric information or information failure is the problem which is to be analyzed and solved. Now, this is why information economics is so important. Without this branch of microeconomic,s it would not be possible to analyze these problems! Coming back to solving the problems of asymmetric information, two ways are signaling and screening.
Asymmetric Information and Information Economics
To discuss the solutions, let us first talk about what might happen due to asymmetric information. Suppose, Information Economics and healthcare. You have symptoms of dengue, but you do not know the adverse effects or the symptoms of dengue. Will you go to the doctor or the hospital? No. This means that underconsumption is happening just because of lack of information. This kind of problems are analyzed in information economics and can be solved by signaling.
Overview – Signaling
To explain signaling, let us consider the most common example that is about employer and employees. When employers are looking for employees, they are looking for certain qualifications in the prospective candidates. However, employers need to know that people have those qualifications. That is done by informing the employers that they have obtained a certain degree from a certain college, by adding that to their cv, which lets the employers know about the qualifications. This adding of that information is signaling.
Basically, the person who the information about informs the concerned authority that “I have these qualifications” to ignore information failure. If there were no such information given, then the employers would not know enough information about the candidates, leading to a very lengthy, tedious and inefficient recruitment process.
Overview – Screening
To explain screening, let us consider plane tickets. Plane tickets nowadays are bought on websites. In the website,e many options are given to a passenger to choose from, from the cheapest options to the most expensive ones. Now, without any further information, a passenger would either buy the cheapest one or just become confused and not buy at all. But, because of screening, the information will be displayed on the websites. Information that says what offers each price comes with. This makes it easier for the passengers to choose because now they can just see options and what is available and choose the most desirable ones. Otherwise, there may have been a lot of inefficiency and chaos.
Example- Anti-tobacco Campaign
The Government uses different policies to minimize the effects of asymmetric information. One example is by introducing the anti-tobacco campaign by displaying its moral, health and social hazards. Another way could be making the citizens more aware of health issues, the importance of education, etc. In short, tall policies need information, no matter what it is, and that is where information economics comes in, and that is why it is so important.
Information Economics and Government policies
Information Economics and government policies are related in more ways. Information Economics is also needed to understand the concept of efficiency, full employment of resources and price stability. Efficiency requires information and needs proper information on price, demand, and resources. For example, to be efficient, a company needs to produce to the fullest with the lowest possible costs. For this, it needs to know about what resources they need, their prices and what prices are the consumers willing to buy at. The proper information regarding these will help them produce to the fullest, to meet the right amount of demand at the minimum cost.
Importance of Economics in Start-up
Just like efficiency, firms also need to know how much resources are available in the economy. To know that, they need information about how much of the necessary resources available in the economy to exploit the resources to the fullest. For example, a firm needs labor but is not aware of the unemployment in the economy, thus not trying to look for it, but it would if they knew about it. The other factor, price stability is also highly affected by information economics. Price stability is keeping inflation at its lowest, maybe, 1% and also not inducing deflation.
For that, the Government needs to make certain policies, such as fiscal policy or monetary policy. To decide on what policies to use, they need information about the inflation level and what is causing it.
At the end
Therefore, throughout this paper, we can see what and how important information economics is and how it is applied in the economy. To summarize the whole thing, to flourish, the people in an economy has to have clear information about it. From choosing what to eat for lunch to choosing important Government policies, information is needed and to analyze what kind of information is needed and to what extent, information economics is needed.