EFFICIENT INFORMATION SEARCH: A comparison between the cost of acquiring information and the benefit generated by the information such that it is not possible to increase welfare or well being by acquiring any more of any less information. Efficient information search is achieved by equating the marginal cost of search with the benefit of search. This efficiency is comparable to the profit-maximizing decision by a producer and the utility-maximizing decision by a consumer.The efficient acquisition of information is analogous to the production or consumption of any good. Acquiring information is beneficial, but doing so incurs a cost. Information is produced. Information is consumed. Efficiency is achieved by equating the incremental opportunity cost incurred in the production or acquisition of information (marginal cost of search) with the increment benefit generated from the information (marginal benefit of search). Like all efficiency decisions, equating the marginal cost of search and the marginal benefit of search means that the corresponding level of search effort attains the highest possible level of satisfaction. It is not possible to increase satisfaction by increasing or decreasing search effort. 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, the decision to seek out or produce information, depends on the benefit generated from the information (marginal benefit of search) and the cost incurred in obtaining the information (marginal cost of search). Marginal Benefit of SearchOne half of the efficient search decision depends on the benefit generated by the information. This is embodied in the marginal benefit of search. Information search generates several different types of benefit:
Marginal benefit of search decreases with an increase in search effort. 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 SearchThe other half of the efficient search decision is based on the cost incurred in the search. This is embodied in the marginal cost of search. Information search incurs the same types of cost as the production of most goods:
Marginal cost of search increases with an increase in search effort, comparable to increasing marginal cost for any type of production. 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
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.
This can be summarized with the efficient information search rule.
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. Check Out These Related Terms... | marginal cost of search | marginal benefit of search | economics of information | information | information search | asymmetric information | adverse selection | moral hazard | marginal benefit of search | marginal cost of search | signalling | screening | Or For A Little Background... | market | barter | scarcity | efficiency | sixth rule of ignorance | marginal cost | marginal revenue | marginal utility | And For Further Study... | public choice | innovation | good types | market failures | financial markets | institutions | rational ignorance | rational abstention | risk | uncertainty | risk preferences | risk aversion | risk neutrality | risk loving | marginal utility of income | ![]() Recommended Citation: EFFICIENT INFORMATION SEARCH, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: June 29, 2024]. |