DEPICTING DEADWEIGHT LOSS FROM IMPERFECT INFORMATION
Keywords:asymmetric information, deadweight loss, imperfect information, lemons, market failure
The concept of deadweight loss is used by introductory microeconomic textbooks to convey the social welfare consequences of many market failures and distortions. But while the market model is used to reveal the deadweight loss from externalities, market power, taxes, tariffs, and even public goods, it is not employed to illustrate the deadweight loss from imperfect information. This paper advances a way to relate imperfect information’s effect on social welfare by showing the deadweight loss it causes within the standard supply and demand framework.
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