1.3.4 Infomation Gaps Flashcards
What is perfect infomation?
This occurs where buyers and sellers have potential access to
the same information; this is perfect information.
However, many decisions are based on imperfect information and so economic agents are unable to make an informed decision; they suffer from an information gap.
What is Asymmetric infomation?
When one party has superior knowledge compared to
another.
Usually, the seller has more information than the buyer and this means they can take advantage of the other party’s lack of knowledge, by charging them a higher price.
How does advertising affect infomation gaps?
Most advertising leads to information gaps as it is designed to change attitudes of the consumers to encourage them to buy the good. It could cause them to think the benefits are greater than they actually are.
What does the increase in technology mean for infomation gaps?
Increases in technology mean information gaps are on the decline as people can get more information. The era of instant infomation.
Why do infomation gaps lead to market failure?
Information gaps lead to market failure as there is a misallocation of resourcesbecause people do not buy things that maximise their welfare.
Economic agents are unable to make rational decisions due to the information gap.
What are some examples of infomation gaps?
Drugs - people do not see the long term consequences and instead seek the short term benefits.
Financial services - where the suppliers have more
information than the consumers so abuse their customers for their own benefit **(moral hazard). **
What is the Principal - Agent problem?
When the goals of the principal (the person who gains / loses from the decision) are different from the agents (those who are making decisions on behalf of the principal).
