Imperfect Information

Question 1

What is information gaps/failure?

Answer 1

Occurs when people have inaccurate, incomplete, uncertain or misunderstood data so make potentially wrong or suboptimal choices

Question 2

Key issues with information gaps/failure

Answer 2

Can have a big effect on the individual, family, society and even the government as they might have to intervene

Question 3

Causes of information gaps?

Answer 3

Misunderstanding the trust costs/benefits
Uncertainty about costs and benefits
Complex information
Inaccurate or misleading information
Addiction **
Lack of awareness
Habitual purchase (buying goods out of habit)

Question 4

Examples of information gaps?

Answer 4

Addiction to painkillers
Gaining entry to elite degree courses
Risks from using tanning salons
Knowledge of nutritional content of foods

Question 5

Symmetrical information

Answer 5

Consumers and producers have the same knowledge about products, they know all the effects of consuming them

Question 6

Asymmetrical information

Answer 6

Imbalance in information between buyer and seller which can distort choices

Question 7

Examples of asymmetric information

Answer 7

Landlords know more than tenants
Car insurance companies
Doctors have more knowledge than patients
Financial markets
Some students know how to get into elite unis (superior knowledge)

Question 8

Moral Hazard

Answer 8

Occurs when insured consumers are likely to take greater risks when they know their claim will be paid for by their cover (insurance)

Question 9

Adverse Selection

Answer 9

Most likely to purchase health insurance are those who will use it. (Smokers and drinkers) The health insurance knows this, raises the average price of insurance