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Ashish's Niti

Niti in Sanskrit means policy/strategy/vision. This blog hosts my political views, along with news and commentary. This blog has moved here.

Thursday, July 29, 2004

Transactions and imperfect information

Any transaction suffers from three imperfections in information available: only buyers know exactly what they want, only sellers know exactly what they are trying to sell and nobody knows what is going to happen in future.

There is nothing you can do about not knowing the future. For example, it is impossible to test all conditions beforehand and sellers themselves may not know how their product/service will work in the future.

In second case, in a free market economy, sellers can take advantage of their "inside" knowledge about the product/service they are trying to sell.

In a highly controlled economy, Govt. might control technical quality of the product (like ensuring few defects per se) but might make mistakes in understanding what buyers want. Or sellers can lobby the Govt. resulting in abuse of Govt. powers to limit competition. This is real danger and whereever Govt. is given such powers, we see either shortages or wastage. Not because products are of inferior quality but because producers produce what they can and not what buyers want (including unnecessarity high quality products).

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