Answer Happy

Consider this adverse selection problem: Because of hidden information, sellers of low-quality products can claim to offer a high-quality product. At any price, high-quality sellers will not participate in the market as it does not compensate for the quality difference that they are offering. Knowing this, consumers will not buy because only low- quality products are offered. The government is considering three policies to help alleviate this adverse selection problem (where sellers have more information about product quality than buyers). Which of these policies is likely to increase total surplus (ie, increase output sold)? Does the answer depend on something? Explain. (i) The government subsidizes Consumer Reports, which contains reliable information about product quality. (ii) The government imposes quality standards: firms can only sell high-quality goods. (iii) The government requires all firms to offer extensive warranties. (iii) The government requires all firms to offer extensive warranties.