Imperfect Information Flashcards
What is assumed in a competitive market?
There is perfect information:
• Buyers and sellers are assumed to have full knowledge regarding prices, costs, benefits and availability of products.
What is symmetric information?
Perfect information which is equally available to all participants in a market.
What does symmetric information allow for?
Under the assumption that buyers and sellers are rational.
Symmetric information will allow the efficient allocation of resources in and between markets.
What is an issue with symmetric information?
Symmetric information rarely exists, buyers do not have the time or resources to obtain full information on prices before buying a product.
What is usually the case with buyers and sellers?
- Sellers have more information on a product than buyers
* Buyers may have more information than sellers.
What is asymmetric information?
• When buyers or sellers have more information, this is known as asymmetric information and information is imperfect.
How does predictability affect information?
Providers of some services may have a lack of information because the thing they provide a service for is unpredictable.
Where does a moral hazard arise from?
Asymmetric information.
What is a moral hazard?
• People take risks because they won’t suffer the consequences themselves if things go wrong, an individual may behave recklessly safe in the knowledge they are covered.
how does imperfect information affect merit goods?
Imperfect information means that merit goods are underconsumed and demerit goods are overconsumed.
What are the reasons for imperfect information affecting merit goods?
- Consumers may not know the full personal benefit of a merit good.
- Consumers may lack the information to decide which good or service is right for them
- Consumers may not have the information on how harmful a demerit good is
- Advertising for a demerit good may withhold health dangers
How dose information failure lead to market failure?
Due to information failure, merit goods tend to be underprovided, and demerit goods are overprovided.
This leads to a misallocation of resources and market failure.
Why does imperfect information affect the provision of merit and demerit goods?
- Pension providers have a greater knowledge of the pension schemes available than their clients.
- Doctors have greater knowledge of medicine, persuade their clients to purchase more expensive care than is necessary: Buyer has more knowledge than the seller.
- Information on a good/service may be too too complex to understand.
