21- Market Failure- Information Gaps

Question 1

What is symmetric information?

Answer 1

Where buyers and sellers have access to the same information.

Question 2

What is a information gap/failure?

Answer 2

Whether buyers and sellers don’t find the information they need to make the decision to maximise welfare.

Question 3

What is assymetric information?

Answer 3

Where either buyer or seller has more information than the other. The agent with more information can exploit the information gap to their benefit

Question 4

Demand curve when buyers underestimate the benefits of buying a good because of information failure?

Answer 4

• The actual demand curve will be to the left of the demand curve with perfect information. Too little will be bought at too low a price.

Question 5

Market examples of misinformation?

Answer 5

• Education
• Pensions
• Drugs
• Financial services
• Advertising

Question 6

Moral Hazard definition

Answer 6

When an economic agent makes a decision in their own best interest knowing that there are potential adverse risks, and that if problems results, the cost will be partly borne by other economic actors.

Question 7

What is the Principal agent problem?

Answer 7

It occurs when the goals of principals, those standing to gain or lose from a decision, are different from agents, those making decisions on half of their principal.
e.g. shareholders (principals) and managers (agent)
children (principals) and parents (agents)