[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

and products. It is hard to imagine government bureaucrats developing MP3 players
or iMacs in neon colors. Markets also generally ensure that resources are used
efficiently.
Exchange in markets is a key to understanding how resources are allocated, what is
produced, and who earns what.
INFORMATION
Making informed choices requires information. After all, it is hard to weigh the costs
and benefits of alternative choices if you do not know what they are! A firm that is
contemplating the purchase of a new software system needs to know not only the costs
of the various alternatives but also the capabilities and limitations of each. Information
is, in many ways, like other goods and services. Firms and individuals are willing to
purchase information, and specialized institutions develop to sell it. In many areas,
separate organizations are designed solely to provide information to consumers.
Consumer Reports is a prime example. The Internet also now serves as a major source
of independent information for buyers. But there are some fundamental ways
in which information differs from other goods. A car seller will let you test-drive a
vehicle, but a seller of information cannot let you see the information before you
buy. Once you have seen the information, you have no incentive to pay for it. Another
way information differs from other goods is that unlike a can of soda or a bagel,
information can be freely shared. When I tell you something, it does not subtract
from what I know (though it may subtract from the profits I might earn from that
information).
In some key areas of the economy, the role of information is so critical that
it affects the nature of the market. In the used-car market, buyers and sellers negotiating
over the price of a vehicle may have quite different information about its
quality. The seller may have better information about the quality of the car but also
has an incentive to misrepresent its condition, since better-quality cars command
higher prices. As a result, the buyer will be reluctant to trust claims that the car is
in perfect shape.
When consumers lack adequate information to make informed choices, governments
frequently intervene to require that firms provide information. In the United
States, we are all familiar with the mandatory nutritional information placed on
food products. The Securities and Exchange Commission (SEC) that oversees
American stock markets compels firms to meet certain reporting requirements
before their stock can be listed on exchanges such as the New York Stock Exchange.
Such reporting helps ensure that private investors have reliable information on
which to base their investment decisions. Often, however, these regulations do not
work adequately, as the Enron scandal in 2001 clearly illustrates. The oil trading
company Enron had cooked its books to overstate its profitability in its mandated
reports. One outcome of Enron’s subsequent financial collapse was the introduction
of new regulations designed to improve the reliability of the information that
companies must provide to the public. Governments also regulate the safety of products.
In the United States, the Food and Drug Administration (FDA) must approve
new pharmaceuticals before they can be sold. The need for such oversight was driven
WHAT IS ECONOMICS? ∂ 13