Chapter 17: Imperfect Markets

Question 1

Imperfect information

Answer 1

Where buyers or sellers or both lack information to make informed decisions

Question 2

Asymmetric information

Answer 2

When 1 party to an economic transaction has more knowledge than the other

Question 3

Information failure/gap

Answer 3

When buyers or sellers or both do not have the information that is available to make a decision

Question 4

Principal-agent problem

Answer 4

When the goals of principals (those who would gain/lose from a decision) are different from agents (who make decisions on behalf of the principal)

E.G
- Parents (agents) and children (principal)
- Shareholders and managers

Question 5

Moral hazard

Answer 5

When an economic agent makes a decision in their own best interest knowing that there are potential negative risks, and this if problems result, the cost will be paid by other economic agents