1.3.4 Information gaps

Question 1

Symmetric information

Answer 1

Where all parties have equal access to information in a transaction.

e.g. when buying items online consumers can often see other people’s reviews for the products. As a result, they are more able to make an accurate valuation of the product and whether the price is correct for the benefit they will receive through consuming the product.

Question 2

Asymmetric information

Answer 2

When one party has less market knowledge than the other party in a transaction - usually the producer has more information than the consumer.

e.g. When purchasing a used car, the seller may possess more information about the car’s condition and history than the buyer. This information asymmetry can lead to concerns about hidden defects or undisclosed accident history.

Question 3

Imperfect market information (or information gaps)

Answer 3

People lack knowledge to make informed choices.

Question 4

Imperfect information leading to a misallocation of resources:

Answer 4

Information gaps leads to a misallocation of resources, because people do not buy things that maximise their welfare.
This leads to under/over consumption and production of a good or service, and thus not at the social optimum.
Economic agents are therefore unable to make rational decisions due to the information gap.

Question 5

Examples of information gaps

Answer 5

Drugs: users do not seem the long term health 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).