Suppose that a lack of information leads individuals to underestimate the true benefits of “early detection” medical procedures, like screening for colon cancer. This leads to a discrepancy in the informed demand (which captures the true private marginal benefits from screening tests) and the uninformed demand.
a. Use a supply and demand diagram to illustrate how this lack of information could lead to an inefficiently low level of colon cancer screening tests being undertaken. Be sure to indicate the size of the inefficiency resulting from poor information on your graph.
b. How might the government intervene to address this source of market failure?