1.3.4 Information Gaps

Question 1

What is meant by asymmetric information?

Answer 1

Asymmetric information is when the buyer and selle have different levels of information.

Question 2

Give 3 examples of markets with asymmetric information

Answer 2

• Legal services
• Financial advice
• Medical and dentist services

Question 3

in what way do information gaps give rise to market failure?

Answer 3

This leads to inefficient allocation of resources as either as either production or consumption decisions may not be based on full understandings of the facts.

Question 4

How does asymmetric information give rise to adverse selection?

Answer 4

This issue is more seen in the health industry as the buyer knows whether they are a peach or a lemon but the seller doesn’t meaning that the price will rise up until there are no peaches left in the market. This is inefficient as there are people who don’t have insurance.

Question 5

How does asymmetric information give rise to immoral hazard?

Answer 5

Moral hazard leaves people to act in an unnatural way. For example if someone has insurance on a phone screen then they will be less careful with their phone which leads to a higher chance of a broken phone screen.