Chapter 8: Information failure Flashcards
What needs to happen if markets are to be effective in guiding resources allocation?
It is important that economic decision makers receive full and accurate information about market conditions.
What is known as ‘symmetric information’?
When all traders in a market have the same information about market conditions.
What do consumers need information about?
Price and quantity.
What is known as ‘asymmetric information’?
When not all traders have access to good information or some traders have more or better access to it than others.
What type of information can be a source of market failure?
Asymmetric information.
What causes under/over consumption of goods that have externalities?
Imperfect information (information failure)
When does information failure occur?
When people have inaccurate, incomplete, uncertain or misunderstood data so they may make the ‘wrong’ choices.
Give an example of when you under-estimate the private benefit from consuming a particular service.
Consumers well underestimate the long term private benefits from investing time and money into extra education.
Give an example of when information failure occurs as a result of misunderstanding the true costs and benefits of a product.
The private and social benefits from higher education when there are so many universities and courses to choose from.
Give an example of when information failure occurs as a result of uncertainty about costs and benefits.
Some people will over-consume demerit goods such as alcohol and tobacco yet they might not be fully aware of the health problems it might cause and the associated costs.
How does the government try to fill in information gaps?
Through legislation and advertising.
Give an example of when information failure occurs as a result of complex information.
Choosing between makes of computers requires specialist knowledge of hardware.
Give an example of when information failure occurs as a result of inaccurate or misleading information.
Persuasive advertising may ‘oversell’ the benefits of a product leading to a higher demand and consumption than is optimal.
Give an example of when information failure occurs as a result of addiction.
Drug addicts may be unable to stop consumption of harmful substances.
Give an example of asymmetric information occurring.
When a consumer is filling in the forms upon which an insurance company will base the price of a policy on, the consumer could choose to leave out information that they may feel would make a policy more expensive.
