1.3.4: Information Gaps Flashcards
What is symmetric information?
When buyers and sellers have access to the same amount of information in a transaction.
What is symmetric information also known as?
Perfect information.
What is asymmetric information?
When one party has superior knowledge compared to the other in a transaction.
What is asymmetric information also known as?
Imperfect information.
How can information gaps lead to market failure?
There is a misallocation of resources.
Why is there a misallocation of resources due to information gaps?
Because people do not buy things that maximise their welfare.
What is a moral hazard?
When one party acts in a risky manner, as the party doesn’t bear the full cost of the risk.
What is an example of a moral hazard?
Insurance- policyholders can engage in risky behaviour as insurance companies will foot the bill in the case of injury/damage.
What is adverse selection?
When the better-informed party takes advantage of asymmetric information.
What is an example of adverse selection?
Second hand car dealers- sellers refrain from telling information about product quality to buyers.
What is a merit good?
A good with positive externalities (under-consumed in a free market).
What is a demerit good?
A good with negative externalities (over-consumed in a free market).
