1.3.4 Flashcards
When does information failure occur?
When people have inaccurate, incomplete, uncertain or misunderstood data and so make a potentially ‘wrong’ or sub-optimal choice.
When would a government intervene due to information failure?
If information failure in a market becomes serious and persistent
What are examples of information gaps?
-Risks from using tanning salons
-Addiction to painkillers
-Gaining entry to elite degree courses
-Complexity of pension schemes
-Uncertain quality of second hand products
What are causes of information gaps?
-Misunderstanding true costs/benefits
-Uncertainty about costs and benefits
-Complex information
-Inaccurate or misleading information
-Addiction
-Lack of awareness
-Habitual purchase
Symmetric information?
Consumers and producers have the same knowledge about products
Asymmetric information?
An imbalance in information between buyer and seller which can distort choices
What are examples of asymmetric information?
-Used vehicles
-Insider dealing
-Tenants and landlords
-Health insurance
-Borrowers and lenders
-Product warranties
How is a landlord asymmetric information?
They know more about their property allowing them to extract higher rent payments from tenants
How are car insurance companies asymmetric information?
Can’t tell the risks associated with selling premiums to each driver. Some safe drivers maybe have higher premiums than they need.
When does a moral hazard occur?
When insured consumers are likely to take greater risks, knowing that a claim will be paid for by their cover.
Consumer knows more about the intended actions than the insurer.
What is adverse selection?
Sellers have information that buyers do not have about some aspect of product quality.
What is a merit good?
Goods that are better for consumers than they realise, MPB is higher, causing under-consumption
What is a demerit good?
Goods that are worse for consumers than they realise, MPB is less, leads to over-consumption
How do merit and demerit goods refer to information failure?
Lead to differences between actual and perceived private benefits.
