1.3.4 Information Gaps ✅ Flashcards
In order for the market to effectively guide resource allocation what is needed?
Economic decision makers must receive correct accurate info on market condition (eg price for consumers).
What is symmetric information?
When buyers and sellers have same info on market conditions.
What is asymmetric information?
When buyers and sellers have different levels of info on market conditions.
What are the impacts of asymmetric info?
Market failure.
Confusion in socially optimum prices and quantities resulting in over or under provisions.
What are merit goods? How does this link to info gaps?
Goods that bring unanticipated benefits to consumers at it is likely to be under consumed/provided in a free market.
As consumers don’t hav enough info to make rational choice. (Lack of info)
Gov can look at more long-term benefits (may be inclined to take action on that).
What is adverse selection? Give an example?
Better informed party uses the asymmetric info to take advantage of the other party before an agreement.
(Market exchange is inefficient).
Second hand market.
What is moral hazard? Give an example?
After a deal between two parties w asymmetric info one party changes their behaviour as a result.
Eg. Insurance on car.
How does information gaps lead to market failure?
Causes irrational decisions.
How does advertising lead to info gaps?
It is designed to change attitudes of the consumer to encourage consumption. Can cause the to think benefits are higher than reality.
What has caused a reduction in information gaps?
Rise in technology (more access to information).
How does information gaps lead to market failure?
Due to misallocation f resources as people do not buy things that will maximise their welfare. Economic agents are unable to make rational decisions to due information gaps.
Demand and supply maybe too high or law therefore price and quantity are not at the socially optimum point.
Give examples of info gaps?
- Drugs (users can’t see the long term problems).
- pensions (young people do not see the long term benefits of paying into their pension schemes).
- financial services (suppliers have more info than consumers thus abuse them).
How does the principle agent problem link to information gaps?
Goals of principle (who gains/loses from decision) are different from the agents (those who make it on behalf of the principle). Eg education
Child = principle
Parents/gov = agent
Child has imperfect info as they do not see the benefits of education.
