2.9 Information Failure

Question 1

Types of information failure

Answer 1

1. Misleading or incomplete information
   E.g. misleading claims in advertising products or not enough information about the full effects of producing/consuming a product
2. Uncertainty of information
   E.g. about future benefits associated with pensions products
3. Misunderstanding
   E.g. scientific/medical research
4. Complex infromation
   E.g. product sales with extensive associated complex contracts
   *information failure restricts efficiency in markets and, therefore results in market failure *

Question 2

Asymmetric information

Answer 2

Asymmetric information occurs when one agent in an economic transaction has better information about a good/service than the other economic agent

Question 3

Adverse selection

Answer 3

Adverse selection occurs as consequence of asymmetric information, where an economic agent with superior information uses it to their advantage. The unequal information distorts the market and leads to market failure