2.10 Asymetric Info Flashcards
What does the Mort theory believe about consumers?
Consumers possess some perfect levels of information regarding market reactions.
This theory suggests that consumers are aware of the variety of prices and quality levels available for goods.
Why is it unlikely that consumers possess perfect information?
Consumers are constrained on time and access to information.
Even in the digital age, it is hard for consumers to make decisions as they cannot absorb all alternatives.
What is adverse selection in the context of market theory?
Adverse selection occurs when one party has more information about the characteristics or quality of a good than the other party.
This leads to situations where buyers may pay too much for goods due to lack of information.
Give an example of adverse selection.
A seller knows that land will be used for a chemical plant, but the buyer has no clue.
This causes the buyer to pay too much for the land.
What can cause entire industries to experience adverse selection?
When sellers hold back information about the quality of their goods, leading to higher prices than optimal for the market.
An example is the tobacco industry, where producers knew about the health risks but withheld that information.
What is moral hazard?
Moral hazard is when a party changes behavior after a transaction because they feel less risk due to previous agreements.
An example is an insurance customer who claims not to engage in dangerous activities but later does.
What is a potential consequence of moral hazard?
Individuals may engage in riskier activities that they might not have otherwise.
This can undermine their financial well-being.
Fill in the blank: Adverse selection can lead to goods being sold at _______.
higher prices than optimal for the market as a whole.
What are appropriate responses to asymmetric information in markets?
Imposing access to information and public attempts at appropriate responses.
This can help mitigate issues arising from adverse selection and moral hazard.
What is the public response to asymmetric information in consumer protection?
Legislation and regulation aimed at direct provision of information.
This includes laws making it illegal for producers to provide false information, such as truth in advertising laws.
What does advertising need to be according to truth in advertising laws?
Truthful and not misleading, with appropriate scientific backing when necessary.
This ensures that consumers receive accurate information regarding products.
What exists to monitor compliance with consumer information regulations?
Regulatory agencies responsible for monitoring disclosure requirements of firms in various industries.
These agencies ensure that companies adhere to the laws related to consumer information.
What is a private response to asymmetric information in consumer protection?
Myriad options including publications that can be purchased, such as consumer reports.
These reports provide detailed insights and evaluations of products to aid consumer decision-making.
Fill in the blank: The existence of regulatory agencies is to _______.
[monitor compliance with consumer information regulations].
True or False: Advertising must always be misleading according to truth in advertising laws.
False
Advertising is required to be truthful and not misleading.
