2.9 Information Failure Flashcards
What is symmetric information and what does it lead to
Symmetric information means that consumers and producers have perfect market information to make their decision. This leads to an efficient allocation of resources
What is asymmetric information and what does it lead to
Asymmetric information leads to market failure. This is where there is unequal knowledge between consumers and producers. This could lead to a misallocation of resources.
What is imperfect information and what does it lead to
Where information is missing so an informed decision cannot be made. This leads to misallocation of resources, consumers might pay too much or too little and firms might produce the incorrect amount
How can information be made more widely available
Through advertising or government intervention
What causes negative externalities
They are caused by demerit goods. These are associated with information failure, since consumers are not aware of the long run implications of consuming the good, and they are usually overprovided
What causes positive externalities
They are caused by merit goods. These are associated with informstion failure, because consumers do not realise the long run benefits to consuming the good and they are underprovided in a free market
What effects the extent to which the market fails
The extent to which the market fails invokves a value judgement, so its hard to determine what the monetary value of an externality is. Different individuals will put a different value on it. This makes determining government policies difficult
Give an example of market failure due to information failure
The consumption on cigarettes. At the point of consumption consumers are unware of the true health risks the goods have ( there is information asymmetry between manufacturers and consumers ). As a resukt the consumer may consume more than if they had perfect information
