2.10 Market Failure - Asymetric Information

Question 1

Asymmetric information

Answer 1

When one party in a transaction has more information than the other party.

Question 2

Result of asymmetric information

Answer 2

• When producers know more: Over allocation of resources (high prices)
• When consumers know more: Under allocation of resources

Question 3

adverse selection

Answer 3

A situation wherein one participant has more information before a transaction occurs

Question 4

moral hazard

Answer 4

A situation in which one participant takes on more risk because they do not pay the consequences of increased risk

Question 5

difference between adverse selection and moral hazard

Answer 5

adverse = before transaction 
moral = behaviour changes after transaction

Question 6

principal-agent problem

Answer 6

conflict of interest when the objectives of the owners of a firm and the objectives of the firms managers are different

Question 7

government responses to asymmetric information

Answer 7

Legislation, regulation, provision of information

Question 8

Private responses to asymmetric information

Answer 8

Signalling and screening

Question 9

signalling example

Answer 9

CVs and resumes in hiring process

Question 10

signalling disadvantages and advantages

Answer 10

must be consequences, takes time for new information (adv = cost effective, increases info, improves efficiency)

Question 11

Screening

Answer 11

The party without information requiring the other party to reveal it, useful in dealing with adverse selection