Information failure

Question 1

What is information failure?

Answer 1

Some/ all participants in an economic exchange don’t have perfect knowledge

Question 2

What is asymmetric information??

Answer 2

One participant in an economic exchange knows more than the rest(information not shared equally between two parties)

Question 3

Examples of a lack of perfect knowledge

Answer 3

• The producer creating negative/positive externalities not realising their impact
• the consumer using a merit/demerit goods not realising the true benefit / cost
• lack of property rights, does the producer realise the long term effects of their actions eg fishing in the sea

Question 4

Why is lack of property rights a problem

Answer 4

Markets work most effectively when producers and consumers are granted property rights, but in many cases these can’t be allocated easily for certain resources eg the sea. Failure to assign property rights may limit the ability of markets forming

Question 5

Whats a moral hazard??

Answer 5

The risk that a party has not included in a contract in good faith, providing misleading information

Question 6

Why is asymmetric information an example of market failure

Answer 6

If the producer has more knowledge than the consumer then the consumer may overestimate the private benefit they receive.

Question 7

Solutions for asymmetric information and imperfect knowledge

Answer 7

Regulation: advertisement that is more informative and less persuasive, force producers to provide all information associated with their good

Government intervention- providing information campaigns.