The problem leading to the development of the economics of information can be characterized as follows:

Question

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The problem leading to the development of the economics of information is that fixed costs are high but marginal costs are low. This creates a situation where firms must invest heavily in fixed costs (such as research and development) in order to produce the good or service, but once those costs are sunk, the cost of producing an additional unit (marginal cost) is low. This creates inefficiencies in the market as firms may not have the incentive to produce a socially optimal level of output because they are not able to recoup their fixed costs. The development of the economics of information seeks to understand how information asymmetries and other factors can affect market outcomes in this context.

The Problem Leading to the Development of the Economics of Information