Crystal Ball

Better information on risky events may lead to market failure due to adverse selection.

One of the most frustrating time-wasters in life is looking for parking spaces in a crowded city. One searches in vain for a parking space closer to where one wants to go. Meanwhile, street traffic is increased because of these mostly futile searches. Collective welfare would be increased if we knew where the empty spaces were and could reserve them ahead of time.

In general, information that could better match needs with availability would enhance economic efficiency because it ensures that scarce resources are allocated to those with the highest reservation prices.

By providing an inexpensive information clearinghouse for buyers and sellers, the Internet has thus greatly improved economic efficiency. We are all familiar with the eBay auction site which has helped many people to clear out their attic clutters. In San Francisco, some mobile apps, such as MonkeyParking, make it easy for anyone vacating a parking spots in busy areas to auction off that information for a price (All tech considered, 7/2/2014).

Better matching of needs and availability depends on better information on certain events. For example, a parking space is either empty or occupied. But better information on risky events may well lead to collectively inferior results. For example, some genetic traits may lead to higher probability of some unpreventable diseases. Universal genetic screening for these traits would not reduce the incidence of these diseases but would unnecessarily deny coverage to or increase the health-insurance premiums of the trait carrier. In extreme cases, risk-sharing through health insurance might collapse because of adverse selection when people with healthy genes decide not to buy health insurance.