Evaluating a Policy Intervention in a Market with Hidden Information
A government regulator is concerned that in the market for used electronics, low-quality items are driving out high-quality ones due to an information imbalance between sellers and buyers. They propose a new law requiring all sellers to provide a mandatory 90-day warranty on any used electronic device they sell. Critically evaluate this policy's potential effectiveness in solving this market problem. In your evaluation, analyze the likely impact on the behavior of sellers of both high-quality and low-quality goods, and the resulting consequences for buyers.
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In a market for used cars where sellers know the true quality of their vehicle but buyers do not, a new technology is introduced that allows buyers to perfectly and costlessly assess the quality of each individual car before purchase. True or False: This introduction of perfect information will necessarily cause the average transaction price of all cars sold in the market to increase.