Information Failure

Question 1

What are the four requirements for a market to be a “lemon” market?

Answer 1

Asymmetry of information
An incentive exists for the seller to pass off a low-quality product as a higher-quality one
Sellers have no credible disclosure technology
Either a continuum of seller qualities exists or the average seller type is sufficiently low
Deficiency of effective public quality assurances

Question 1

Classical Economics assumes that Economic ______ possess ________ information, and that all groups understand all _______ that are provided by the market (through the price mechanism) in order to react accordingly

Answer 1

agents, perfect, signals

Question 2

What is asymmetric information?

Answer 2

Where one party has access to information that another party doesn’t.

Question 3

What is moral hazard?

Answer 3

the concept that individuals have incentives to alter their behaviour when their risk or bad-decision making is borne by others