1.3.4 Information gaps

Question 1

Information gaps

Answer 1

Unequal information between economic agents.

Question 2

Symmetric information

Answer 2

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.

Question 3

Asymmetric information

Answer 3

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. There is also the irrational thinking of the consumer.

Question 4

Information gaps trend

Answer 4

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.
- Increases in technology mean information gaps are on the decline as people can get more information.

Question 5

How imperfect market information may lead to a misallocation of resources

Answer 5

Information gaps lead to market failure as there is a misallocation of resources because people do not buy things that maximise their welfare. It means that consumer demand for a good or producer supply of a good may be too high or too low, and thus price and quantity are not at the social optimum position. Economic agents are unable to make rational decisions due to the information gap.

Question 6

Information gaps examples

Answer 6

• 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)

Question 7

Principal-agent problem*

Answer 7

When the goals of the principle (the person who gains/loses from the decision) are different from the agents (those making decisions on behalf of the principle).
- One example of this is education where the child is the principle and the agents are parents/governments: the child has imperfect information as they do not see the benefits of education and so therefore will devote too few resources to education, if allowed.