2.10 Asymmetric Information

Question 1

When does “Asymmetric information” occur?

Answer 1

Asymmetric information occurs when buys and sellers do not have equal access to information, which results in an under allocation of goods and services.

Question 2

What is a problem with “asymmetric information”?

Answer 2

One party has more information than the other (or better information)
–> As a result you end up making the wrong decision

Question 3

What is “adverse selection”?

Answer 3

When the seller knows more than the buy

Question 3

What does a market look like when the consumer knows LESS than the producer

Answer 3

Because the consumer is uninformed, the demand curve remains the same (do not have the same information and thus pay the same price for the cars). IF they were informed the demand curve would decrease

Question 4

What does a market look like when the producer knows LESS than the consumer?

Answer 4

When the buyer knows more then the seller (the health insurance game)
EG. They do not disclose they are a heavy smoker
–> they become critically ill –> Insurance cost increase for the insurance company –> prices for all consumers increase (as firm passes on the increase in costs of production)

Question 5

What are “moral hazards”?

Answer 5

One party takes risks but do not face the full costs of these risks. Moral hazard is any situation in which a person makes the decision about how much risk to take, while someone else bears the costs.

Question 6

What is the difference between “adverse selection” and “moral hazards”?

Answer 6

In the case of adverse selection market failure occurs before an economic transaction has been made. This is due to the fact that one party has more information than the other. Whereas for Moral hazard, the market failure only occurs after the transaction as the party with more information has the advantage after the transaction.

Question 7

What are some policies to prevent asymmetric information?

Answer 7

• Regulations
• Legislation
• Provision of information
  —> Government responses
• Screening (when the lest informed party can find a way to receive more information)
• Signalling (the more informed party provides information to the less informed)
  –> Private responses