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Consumer Demand and Information Asymmetry
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In a community where a new public park is proposed, residents are asked to express how much they would be willing to pay for its maintenance. However, many residents understate their willingness to pay, hoping to benefit from the park without contributing financially. How does this situation illustrate the concept of information asymmetry and its impact on public goods provision?

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Choose the Best Answer

A

It shows that consumers can accurately reflect their true preferences, leading to optimal funding for public goods.

B

It demonstrates that consumers often misrepresent their willingness to pay, resulting in underfunding and inefficiencies in public goods.

C

It indicates that consumers are always willing to pay more than they state, ensuring sufficient funding for public goods.

D

It reveals that public goods are never underfunded because all consumers will contribute fairly based on their preferences.

Understanding the Answer

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Answer

In this situation, information asymmetry occurs because residents have private knowledge about their true willingness to pay for the park's maintenance, which they may not fully share. This leads to a gap between what the community believes is needed for funding and the actual support they would provide. As a result, if many residents understate their willingness to pay, there may not be enough funds to maintain the park properly, impacting its quality and availability. For example, if a resident claims they would only pay $10 a year, but would actually pay $50, the community might struggle to gather enough money to keep the park clean and safe. This illustrates how information asymmetry can hinder the provision of public goods, as it prevents accurate assessments of community support and funding needs.

Detailed Explanation

This situation shows that people often say they will pay less than they really would. Other options are incorrect because Some might think that everyone shares their true feelings about money; It's a common belief that people always want to pay more than they say.

Key Concepts

Information Asymmetry
Public Goods Provision
Consumer Behavior
Topic

Consumer Demand and Information Asymmetry

Difficulty

medium level question

Cognitive Level

understand

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