1.3.4 Informtion Failure Flashcards
What is information failure?
It’s when there is a lack of information for an individual or firm to be able to make a rational decision.
What is lack of information?
Lack of info leads to a problem of either under or over consumption
-merit goods are under consumed
-de-merit goods over consumed
What is aysemetric information?
It’s when one party has superior knowledge compared to another.
Sellers have more information than buyers meaning sellers can take advantage of buyers lack of knowledge.
What is symmetric information?
Occurs when both buyers and sellers have potential to access the Same amount of information.
What is an example of asymmetric information and how to overcome it?
Car market is a great example of asymmetric information.
George akelov said buyers lack information when buying a car whereas seller knows full info of car.
Lack of info buyer may buy a lemon car.
To overcome this the buyer can check the
MOT history
Check if its certified pre-owned
Vehicle inspection it
Give an example for firms when they have asymmetric information?
Labour markets
Workers know how well they work but employers don’t know much and they try to predict how they work.
What does information gaps lead to?
It’s leads to market failure as there is a misallocation of resources because people do not buy things that maximise their welfare.
Means consumer demand for goods may be to high or to low where price and quantity are that at social optimum position.
What is a merit good and de-merit good?
Explain the effect when there is information gaps?
A merit good is a good that has positive externalities as they maximise welfare for consumer and society
Information gaps may lead to an underconsumption of it.
A de-merit good is a good that has negative externalities as they are damaging to consumer welfare and society.
Information gaps may lead to a overconsumption of it.
