1.2.2 Imperfect information

Question 1

infomation failure

Answer 1

occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially ‘wrong’ choices

Question 2

infomation gaps

Answer 2

Information gaps exist when either the buyer or seller does not have access to the information needed for them to make a fully-informed decision, leading to a misallocation of scarce resources = market failure

Question 3

symmetric information

Answer 3

for markets to work, buyers and sellers need to have the same perfect information

Question 4

Asymmetric information

Answer 4

buyers and sellers have different amounts
of information
e.g. buyers often know less than sellers when buying second- hand cars; buyers often know more than sellers when buying car insurance

Question 5

adverse selection

Answer 5

people taking out insurance are often those at highest risk e.g. a person leading an unhealthy lifestyle is more likely to take out health insurance, meaning more payouts for insurance company

Question 6

moral hazard

Answer 6

being insured can make you more careless e.g. banks made risky decisions before the global financial crisis aware that they would likely receive bail-outs

Question 7

Principal-agent problem

Answer 7

goals of the principals, those who lose/gain from a decision, are different from the agents, those making the decisions e.g. managers (agents) may have more information than shareholders (principals)

Question 8

improving infomation helps…

Answer 8

producers and consumers value the actual costs and benefits more accurately, reducing or eliminating the market failure.

Question 9

Policies to address info failure:

Answer 9

• compolsury product labels
• improved nutrition info
• hard-hitting advertising e.g. speeding
• campaignes to raise awareness
• preformance league tables for schools
• consumer protection laws
• industry standards and garentees