This rule stems from the fundamental observation that the acquisition of information is like the production of any other good, it requires the use of scarce resources that have alternative uses. As such, like any other good, no one has all of the information that they want or need--information is a scarce good. Moreover, ignorance, or the lack of information, often creates imperfections and causes inefficiencies in a vast array of market transactions.
Information SearchThe key to sixth rule of ignorance is information search. Information search abides by the same principle as the efficient production of any good--balancing the benefit from having the information with the cost of acquiring the information.
On the benefit side is the value of the information itself. For example, knowing that a used OmniMotors XL GT 9000 Sports Coupe that a buyer is planning to purchase has been well-maintained is valuable information. Knowing the sugar content of a Hot Mamma Fudge Bananarama Ice Cream Sundae is also valuable for anyone who happens to be diabetic.
On the cost side is the foregone alternatives of resources used to acquire the information. Resources used to obtain the information cannot be used for other production. The time spent reading the Shady Valley Gazette Tribune Journal each morning cannot be spent building a storage shed in the back yard. The money spent on gasoline driving around Shady Valley checking out prices of Wacky Willy Stuffed Amigos at various stores cannot be spent on peanut covered caramel apples.
Efficient information search results by balancing the cost of information with the benefit. However, because information is costly, no one can obtain all available information, or even all relevant information. Everyone stops short of knowing everything.
Even though people seem to be overloaded with excessive information through television, the Internet, books, newspapers, magazines, and office gossip, like any other scarce good or service, information is limited and everyone is ignorant.
Asymmetric InformationIgnorance is most important for market exchanges and efficiency when it is asymmetric among buyers and sellers. That is, inefficiency emerges when one side of the market has better information than the other.
As a general rule (not always, but often enough to take note), sellers tend to have better information about a good than buyers. Because sellers own and control the good, they generally have more experience with it. They know its pros and cons, strengths and weakness, capabilities and defects. Buyers, in contrast, have limited experience with the good. They are probably unaware of its pros and cons, strengths and weakness, capabilities and defects.
Suppose, for example, that Duncan Thurly is in the market to buy an OmniMotors XL GT 9000 Sports Coupe. He has spotted a candy apple red model that is only five years old. It looks like a great car and an excellent buy at $10,000. But is it?
Does Duncan know if this car was well-maintained with periodic oil changes, tune ups, and the like? Has it been in a traffic accident? Was the mileage on the odometer turned back? Have repairs been done by a third-rate mechanic? Who knows? As a potential buyer Duncan probably does not.
However, the present owner who purchased the car new, is likely to have that information. The present owner is likely to have a great deal of information about maintenance, repairs, and the overall quality of the vehicle.
Due to limited information, Duncan is probably willing to pay more for this OmniMotors XL GT 9000 Sports Coupe than its really worth. If he was aware of every defect and deficiency, his offering price would be lower. But he does not know. The bottom line is that as a general rule (not always, but often enough to take note), ignorance creates a market failure because buyers tend to pay more for a good than it is actually worth.
In Many ActivitiesThe availability of information plays important roles in many diverse activities. An exhaustive discussion is not presently possible, but here is a short list:
- Finance: Information about company performance, economic conditions, and related matters is critical for financial market participants. Buying stock in a pharmaceutical company that failed to have a new drug approved by the Food and Drug Administration is bound to be a bad investment.
- Insurance: The insurance industry thrives on information, such as knowing the likelihood that a person will become sick or die, that a house will catch fire, or that a car will be in a traffic accident.
- Advertising: Promoting products through assorted media is all about information. Those who sell products usually provide only positive information, promoting only the best attributes of their wares.
- Voting: Democratic elections work best when the voting public is well-informed about the pluses and minuses of each candidate.
SIXTH RULE OF IGNORANCE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: January 24, 2020].