2.9-Information failure Flashcards
What is information failure?
Information failure occurs when consumers or producers do not have access to all relevant information, leading to suboptimal decisions.
True or False: Information failure can lead to market failure.
True
Fill in the blank: Information failure often results from __________ asymmetry.
information
What is adverse selection?
Adverse selection is a situation where one party in a transaction has more information than the other, often leading to higher risks for the less informed party.
Give an example of a market where information failure might occur.
The used car market is a common example, where sellers may know more about the car’s condition than buyers.
What role does signaling play in reducing information failure?
Signaling involves actions taken by informed parties to reveal information to uninformed parties, helping reduce information asymmetry.
True or False: Perfect information leads to efficient market outcomes.
True
What is moral hazard?
Moral hazard occurs when one party takes risks because they do not bear the full consequences of their actions, often due to information failure.
Define ‘search costs’ in the context of information failure.
Search costs are the expenses incurred by consumers in gathering information before making a purchase decision.
What is the ‘market for lemons’ theory?
The ‘market for lemons’ theory explains how information asymmetry can lead to a market dominated by low-quality goods.
Fill in the blank: __________ is a strategy used by sellers to convey information about the quality of a product.
Warranties
What is a common solution to information failure in insurance markets?
The use of deductibles and co-payments helps mitigate information failure in insurance by aligning incentives.
True or False: Information failure can only occur in consumer markets.
False
What is the difference between positive and negative information failure?
Positive information failure occurs when beneficial information is not available, while negative information failure occurs when harmful information is withheld.
What is one impact of information failure on consumer behavior?
Consumers may make uninformed choices, leading to dissatisfaction or financial loss.
Define ‘information overload’.
Information overload refers to a situation where consumers are overwhelmed by too much information, making decision-making difficult.
Fill in the blank: __________ policies can help reduce information failure in markets.
Regulatory
What is the role of consumer protection laws in addressing information failure?
Consumer protection laws aim to ensure that consumers have access to accurate information and are not misled.
True or False: Information failure can lead to inefficient allocation of resources.
True
What is ‘brand reputation’ and how does it relate to information failure?
Brand reputation is the perception of a brand’s quality, which can serve as a signal to reduce information failure in the market.
What is the ‘principal-agent problem’?
The principal-agent problem arises when one party (the agent) makes decisions on behalf of another (the principal), leading to potential conflicts due to asymmetric information.
Fill in the blank: __________ can occur when consumers make decisions based on incomplete or misleading information.
Market inefficiency
What is a ‘trust signal’ in the context of information failure?
A trust signal is an indicator, such as reviews or endorsements, that helps consumers gauge the reliability of a seller or product.
True or False: Information failure is always detrimental to market participants.
False
