The economic study of information analyzes the efficient balance between the benefits generated from information and the opportunity costs incurred in the production or acquisition of information. A key result of this study is that efficient information search stops short of complete information, meaning that everyone is ignorant about something (in fact, most everything).

This ignorance is not equally shared by all, meaning information is inevitable asymmetric. Buyers and sellers often have different information about a good being exchanged. This asymmetric information gives rise to three noted problems, adverse selection, moral hazard, and the principal-agent problem.

The Transfer of Knowledge

• Knowledge: This is the body of facts, data, theories, statistics, etc. that have been acquired over time. Knowledge is the "stock" of what we know. Knowledge can be found stored in libraries, electronic databases, and our brains.


• Technology: This is the use or application of knowledge for productive purposes. Technology is doing something with the knowledge. Possessing a book with the knowledge of how to plant crops, manufacture automobiles, or make a silicon chip becomes technology when it is actually used to plant crops, manufacture automobiles, and make silicon chips.


• Information: This is the transmission of knowledge from one person to another. Information is the "flow" that increases the stock of knowledge. Knowledge is converted to information when someone reads a book that explains how to plant crops, manufacture automobiles, or make a silicon chip. In this case the knowledge is transferred from the book to the brain of the of the person reading the book, and information is produced. In other cases knowledge is transferred from an instructor to a student, from a screenwriter to a movie patron, from a blogger to a web surfer.

The economic study of information is primarily concerned with the flow of information, with filling the glass of water. It is the transmission of knowledge from one person to another, and like the transmission, transference, or transportation or other goods, this process employs scarce resources with alternative uses. The transmission of information incurs an opportunity cost.

The Physiology of Information

The physiological reception of information is achieved through the five senses -- sight, sound, touch, taste, and smell. Sight and sound are probably the most common methods of receiving information. Think books, television, the Internet, music. But touch, taste, and smell are also important information receptors. For example, information that an apple pie has been freshly baked is commonly transferred through smell.

Information Search

The production of information, the transmission of knowledge, is termed information search. Efficient information search is achieved through a balance between the benefits of information and the costs.

• Benefits: A primary benefit of information is a more efficient allocation of resources. If consumers have information about the location of goods, their prices, and their wants-and-needs satisfying characteristics, then they are better able to purchase goods that generate the greatest satisfaction at the lowest cost. If producers have information about the location of inputs, their prices, and their productive capabilities, then they are better able to purchase the inputs that generate the greatest production at the lowest cost. In both cases efficiency is enhanced. Information also provides benefits in other ways, not the least of which is the direct consumption of information. That is, some people (curious folks) satisfy their "need to know" just by acquiring information.


• Costs: Like the production of other goods, the acquisition of information requires the use of scarce resources. Labor, capital, land, and entrepreneurship are all used to acquire information. The opportunity cost of labor, in particular, is key to most information search. Reading newspapers, magazines, and books; viewing television and movies; listening to radios and MP3s; surfing the Internet; and talking with other people are all means of searching for information and all incur the opportunity cost of human effort. Of course, capital, land, and entrepreneurship are also employed in the production of books, Internet web sites, television programs, audio files, and other "information goods." Use of these resources also incurs opportunity costs.

This result gives rise to what is termed the sixth rule of ignorance, which states that obtaining information is a costly activity that requires resources with alternative uses and thus no one knows everything and everyone is ignorant about something.

Information Issues

• Asymmetric Information: First up is the observation that information is not equally available to everyone, asymmetric information. Some people are bound to rationally choose to know more than others. In particular, information is likely to be unbalanced or asymmetrically available to buyers and sellers in a market. Sellers, who have possession of a good, often have more information than buyers.


• Adverse Selection: An important consequence of asymmetric information is adverse selection, which arises when the lack of information limits the quality of goods exchanged. Because buyers have less accurate information about the quality of goods, they are likely to offer a lower price, which discourages sellers from offering higher quality goods.


• Moral Hazard: Asymmetric information also leads to moral hazard, which arises when one person makes a decision that adversely affects another. The best example is found with insurance in which an insured person undertakes risky behavior knowing the insurance provider incurs the cost. The problem is that the insurance provider is unaware of the risky actions of the insured person.


• Signalling: Because people lack complete information, they necessarily make decisions based on the few key bits that are available. That is, people seek out indicators or signals that reflect the "bigger picture." For example, an employer uses grade point average as a signal of the quality of a prospective employee. A consumer uses brand name as a signal of the quality of product.