1.3.4 Information gaps Flashcards
The distinction between symmetric and asymmetric information
Symmetric information 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.
Asymmetric information is 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 imperfect market information may lead to a misallocation of resources
- 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.
- 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.
- Some examples of information gaps are: 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).
Principal agent problem
- this is when the goals of the principle (the person who gains or loses from the decision) are different from the goals of the agents (those making decisions on behalf of the principle)
- in example, education, the child is the principle and the agents are the parents/government, the child has imperfect information about the benefits of education so may therefore devote less time and resources towards their education, if allowed.
