The production of information, the transmission of knowledge, is termed information search. Like the production and consumption of other goods, efficient information search entails a balance between the cost of production (or marginal cost of search) and the benefits obtained from the information (marginal benefit of search).

Because information search uses scarce resources, the marginal cost of search is greater than zero and efficient information search always falls short of obtaining complete information. As such, no one knows everything and everyone is ignorant about something, often most everything. Ignorance is the rule rather than the exception.

Efficient information search and the ignorance that results, termed rational ignorance, is crticial to the study of public choice, contributing to voter apathy and government inefficiency.

Information Benefits and Costs

• Benefits: A primary benefit of information is a more efficient allocation of resources. If consumers have information about the location of goods, their prices, and their wants-and-needs satisfying characteristics, then they are better able to purchase goods that generate the greatest satisfaction at the lowest cost. If producers have information about the location of inputs, their prices, and their productive capabilities, then they are better able to purchase the inputs that generate the greatest production at the lowest cost. In both cases efficiency is enhanced. Information also provides benefits in other ways, not the least of which is the direct consumption of information. That is, some people (curious folks) satisfy their "need to know" just by acquiring information.


• Costs: Like the production of other goods, the acquisition of information requires the use of scarce resources. Labor, capital, land, and entrepreneurship are all used to acquire information. The opportunity cost of labor, in particular, is key to most information search. Reading newspapers, magazines, and books; viewing television and movies; listening to radios and MP3s; surfing the Internet; and talking with other people are all means of searching for information and all incur the opportunity cost of human effort. Of course, capital, land, and entrepreneurship are also employed in the production of books, Internet web sites, television programs, audio files, and other "information goods." Use of these resources also incurs opportunity costs.

All About the Marginals

For efficient information search it is a balance between the marginal benefit of search and the marginal cost of search.

• Marginal Benefit of Search: The marginal benefit of search is the additional benefit obtained from information resulting from an incremental change in search effort. That is, what is the benefit of searching an additional hour. As search effort increases the extra benefit obtained decreases. Eventually, with relatively complete information, the incremental benefit of search falls to zero. For example, the first hour spent searching for the best price of Wacky Willy Stuffed Amigos might generate a range of different prices, from a high of $7 to a low of $5, resulting in a beneficial saving of $2. An additional hour of search might reveal a new low price of $4, for a marginal benefit of $1. Further search effort provides incrementally smaller benefits until no lower prices are revealed and the marginal benefit is zero.


• Marginal Cost of Search: The marginal cost of search is the additional cost incurred for an incremental change in search effort. That is, what does it cost to search an additional hour. Comparable to the cost of producing any good, as search effort increases the extra cost incurred also increases. Additional search effort requires additional scarce resources with alternative uses and increasing opportunity cost. For example, the first hour of searching for the lowest price of Wacky Willy Stuffed Amigos might entail an inexpensive walk to a nearby drug store. The next hour might then require a more distant and expensive drive to a discount super center. Further searching requires additional increasingly cost resources.

Efficient Search

Efficient Search

Efficiency is achieved with a balance between benefit and cost, or more specifically, the marginal benefit of search and the marginal cost of search. Each is represented by its own curve.

• Marginal Benefit of Search Curve: The marginal benefit of search is represented by the negatively-sloped marginal benefit curve. Click the [MBS] button to reveal this curve. The MBS curve is negatively-sloped like a standard market demand curve.


• Marginal Cost of Search Curve: The marginal cost of search is represented by the positively-sloped marginal cost curve. Click the [MCS] button to reveal this curve. The MCS curve is positively-sloped like a standard market supply curve.

Searching more than 5 hours means the cost of extra search exceeds the benefit. Extra search is not worthwhile. Searching less than 5 hours means the benefit of extra search exceeds the cost. Extra search is worthwhile.

Key to this analysis is that as long as search is costly, search effort will not increase to the level that forces the marginal benefit of search to zero, to the level in which no further benefit can be obtained. In other words people decided to stop short of complete information. They voluntarily choose to remain (somewhat) ignorant

This result gives rise to what is termed the sixth rule of ignorance, which states that obtaining information is a costly activity that requires resources with alternative uses and thus no one knows everything and everyone is ignorant about something.

Rational Ignorance

Rational ignorance is the decision NOT to become informed about a topic (such as what a political candidate wants to do) because the cost of acquiring the information is more than the expected benefit. The rational decision to remain ignorant about a subject is a straightforward application of utility maximization.

Rational ignorance is important to the study of public choice and voting behavior. The rational decisions to remain ignorant is a key sources of voter apathy and government inefficiency. That is, seemingly apathetic people have simply decided NOT to be informed about the political process because it's not worth the effort.

Information Issues

• Asymmetric Information: First up is the observation that information is not equally available to everyone, asymmetric information. Some people are bound to rationally choose to know more than others. In particular, information is likely to be unbalanced or asymmetrically available to buyers and sellers in a market. Sellers, who have possession of a good, often have more information than buyers.


• Adverse Selection: An important consequence of asymmetric information is adverse selection, which arises when the lack of information limits the quality of goods exchanged. Because buyers have less accurate information about the quality of goods, they are likely to offer a lower price, which discourages sellers from offering higher quality goods.


• Moral Hazard: Asymmetric information also leads to moral hazard, which arises when one person makes a decision that adversely affects another. The best example is found with insurance in which an insured person undertakes risky behavior knowing the insurance provider incurs the cost. The problem is that the insurance provider is unaware of the risky actions of the insured person.


• Signalling: Because people lack complete information, they necessarily make decisions based on the few key bits that are available. That is, people seek out indicators or signals that reflect the "bigger picture." For example, an employer uses grade point average as a signal of the quality of a prospective employee. A consumer uses brand name as a signal of the quality of product.


• Financial Markets: Information is a key factor in financial markets. Financial markets exchange financial instruments or legal claims, such as stocks, bonds, and futures contracts. Those who buy and sell legal claims do so based on information they have about current and expected values. The accuracy of this information plays a big part in who "wins" and "loses" in the financial markets.