2.2 Imperfect Information

Question 1

Define symmetric information and explain its impact

Answer 1

• It means that consumers and producers have perfect market information to make their decision.
• This leads to an efficient allocation of resources.

Question 2

Define imperfect information and explain its impact

Answer 2

• Its where information is missing, so an informed decision cannot be made.
• This leads to a misallocation of resources.
• Consumers might pay too much or too
  little, and firms might produce the incorrect amount. For example, monopolies might
  exploit the consumer by charging them more than they need to.

Question 2

Define asymmetric information and explain its impact

Answer 2

• This is when there is unequal knowledge between consumers and producers.
• For example, a car dealer might know about a fault with the car that the consumer is unaware of.
• This could lead to a
  misallocation of resources.
• Consumers can also know more information than the producer, such as when purchasing insurance policies.

Question 3

Asymmetric information can be linked with the principle-agent problem.

What is the principle agent problem?

Answer 3

• This is when the agent makes decisions for the principal, but the agent is inclined to act in their own interests, rather than those of the principal.
• For example, shareholders and managers have different objectives which might conflict.
• Managers might choose to make a personal gain, rather than maximise the dividends of the shareholders.

Question 4

How could information be more available?

Answer 4

• through advertising or
  government intervention.
• For example, the harmful effects of smoking could be made public through adverts and messages on cigarette boxes.