1.3.4 - Information gaps Flashcards
Define perfect information
when a buyer or seller has a complete understanding of the quality and nature of a good or service
Define symmetric information
when buyers and seller have equal amounts of knowledge about a good or service
Define imperfect information
when a buyer and/or seller lacks a complete understanding of the quality and nature of a good or service
Define assymetric information
when a buyer or seller has more information about a good or service than the other party
Define information gaps
when either the buyer or seller does not have access to the information needed for them to make a fully informed decision
Give example of positive consumption externalities
gym membership, vaccinations, healthy food, public transport
Give examples of negative production externalities
coal power plants, factories that emit pollutants, festivals that blast loud music
What shape is the cost benefit analysis of a negative production externality and a positive consumption externality
Negative = upwards v
positive = downwards v
NEVER TOUCH THE AXES
What is assumed in a competitive market
There is perfect information so buyers and sellers are assumed to have full knowledge regarding prices, costs, benefits and availability of products
What does imperfect information lead to
imperfect info means merit goods are underconsumed and demerit goods are overconsumed bc
- consumers don’t know full benefit of a merit good
- consumers lack info to make decision that is right for them
- consumers don’t have infor on how harmful a demerit good is
What does information gaps lead to
due to info gaps, merit goods are underprovided, demerit goods are overprovided, causing misallocation of resources and market failure
Provide examples of how imperfect info affects provision of merit and demerit goods
- drugs, where users do not see the long term problems;
- pensions, where young people do not see the long term benefits of paying into their pension schemes;
- financial services, where the suppliers have more information than the consumers so abuse their customers for their own benefit (moral hazard).
- Doctors have more knowledge of medicines than consumers so they may persuade a consumer to buy more expensive medicine than they need
Define moral hazard
- result of assymetric info
- when someone takes risks because they won’t face consequences if something goes wrong
Define moral hazard
- result of assymetric info
- when someone takes risks because they won’t face consequences if something goes wrong
