Imperfect Consumers and Welfare Comparisons of Policies Concerning Information and Regulation

Consumers possess limited capacity to process technical information concerning the characteristics of products. As a result, two forms of regulation (e.g., by the FDA or FTC) sometimes appear in the form of requirements for more understandable information about the product or restrictions on the types of products sold. This paper presents a framework for understanding and evaluating the consequences of these two forms of regulation. By using Lancaster's new approach to consumer theory, we develop a model for consumer behavior with imperfect information processing, which is then used to illustrate methods for evaluating the welfare effects of regulation.