2.10 Market Faukure - Asymmetric Infromation

Question 1

What is asymmetric information

Answer 1

Refieres to a situation when one party in the economic transaction has more, or better quality information than the other part

Question 2

2 types of asymmetric information

Answer 2

Adverse selection
Moral hazard

Question 3

What is adverse selection

Answer 3

When one party has better quality information than the other, resulting in economic decisions that are not always optimal

Question 4

Solution to adverse selection

Answer 4

Government responses:
- regulation
- provision of information
- licensures

Private responses
- screening —> method used by the party with limited information, where they attempt to receive more information on the product

• signaling —> method used by the party that has more information, where buyers are convinced that the product being sold is of good quality

Question 5

Explain moral hazards

Answer 5

Refers to situations where on party takes risks, but does not face the full costs of these risks because the full costs of the risks are borne by the other party

E.x people who pay for insurance are likely to take less good care of car as costs will be on the seller