22) Information gaps

Question 1

How can information gaps cause a market to fail?

Answer 1

Neoclassical economics assumes that rational consumers use perfect information to make allocative decisions to maximise their utility, however in reality there is information failure / an information gap.

Question 2

What is the principal-agent problem?

Answer 2

The “principal” is the person who gains (or loses) as a result of an economic decision.
The “agent” is the person who makes the decision for the principal.
The problem arises if the agent makes decisions for their own benefit rather than the benefit of the principal

Question 3

What is the moral hazard?

Answer 3

This is where the seller of a product can never lose

Question 4

What is asymmetric information?

Answer 4

Where buyers and sellers have different amounts of information, with one group having more information than the other