Information Gaps (1.3.4) Flashcards
What are Information Gaps?
Refers to a situation where one party in a business deal had more information than the other party. Its usually the seller has more info than the buyer and its also know as asymmetric info. Where there is an info gap the market isn’t running efficiently and it can lead to market failures.
What’s an example situation where there is an Information Gap?
e.g. A car salesman selling a car will generally have more information about the car than the buyer so the seller could just not mention some certain damage etc.. and so the buyer will be getting partially ripped off.
How are information gaps reduced in food packaging?
In food packaging they are forced to show a snapshot of their nutrition in their food packaging to show to consumer how unhealthy certain things are. This reduces the chance of information gaps and it can reduce the demand of a good or service.
What is Symmetric Info?
Buyer and Seller have the same amount of knowledge about a good or service. product could be underpriced.
What is Asymmetric Info?
Buyer and Seller have different amounts of knowledge about a good or a service. Means seller can get more as a buyer wont know the price. Over-Priced.
What do Information Gaps lead to?
Market failure as there is a misallocation of resources because people don’t buy things that maximise their welfare.
What is the principle-agent problem?
When the goals of the principle (person who gains/ loses from decision) are different from the agents (those making decision on behalf of the principle)
What’s an example of the principle-agent problem?
In education where the child is the principle ad the agents are the parents/governments: the child has imperfect information as they do not see the benefits of education and so therefore will devote too few resources to education, if allowed
