Information gaps

Question 1

When does information failure occur?

Answer 1

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

Question 2

What are information gaps?

Answer 2

They exist when either the buyer or the seller does not have access to the information needed for them to make a fully informed decision leading to a misallocation of scarce resources (market failure)

Question 3

What is assymetric information?

Answer 3

buyers and sellers have different amounts of information eg: buyers often know less than the sellers when buying second hand cars, buyers often know more than seller when buying car insurance

Question 4

What is adverse selection?

Answer 4

People taking out insurance are often those at highest risk eg: a person leading an unhealthy lifestyle is more likely to take out health insurance meaning more payouts for insurance company

Question 5

What is moral hazard?

Answer 5

Being insured can make you more careless

Question 6

What is the principal agent problem?

Answer 6

Goals of the principals, those who lose or gain from a decision are different from the agents, those making the decisions may have more information than shareholders (principals)

Question 7

What are examples of information failure?

Answer 7

Risks from using tanning salons

Addiction to painkillers and other drugs

Gaining entry into elite degree courses at university

Complexity of pension schemes

Uncertain quality of second hand goods

Knowledge of the nutritional content of food
Tourist bazaars

Question 8

What are government policies that could improve information?

Answer 8

Compulsory labelling on products

Improved nutritional information on food / drinks

Hard hitting anti speeding advertising

Campaigns to raise awareness of risks of drink driving/drug abuse/smoking