1.3.4- Information Gaps

Question 1

What is symmetric information?

Answer 1

Consumers and producers have perfect market information to make their decision, so resources are allocated efficiently

Question 2

What is asymmetric information?

Answer 2

When one party has superior knowledge compared to another, so a high price may be charged or too little/much will be consumed

Question 3

Why does advertising lead to information gaps?

Answer 3

It is designed to change attitudes of the consumers to encourage them to consume the good, so it could cause them to think the benefits are greater than they actually are

Question 4

What means information gaps are on the decline?

Answer 4

Increases in technology

Question 5

Why do information gaps lead to market failure?

Answer 5

There is a misallocation of resources as people don’t buy things that maximise their welfare, so demand or supply many be too high or low, so price and quantity aren’t at the social optimum position

Question 6

What are some examples of information gaps?

Answer 6

Drugs, pensions, financial services

Question 7

What is the principal-agent problem?

Answer 7

When the goals of the principal ( the person who gains/loses from the decision) are different from the agents (those making decisions on behalf of the principal)

Question 8

What are two examples of the principal-agent problem?

Answer 8

• the child has imperfect info as they don’t see the benefits of education so will devote too few resources to education
• manager may choose to make a personal gain, rather than maximise the dividends of shareholders