Lesson 18 - Information Failure

Question 1

What is imperfect information and what does it lead to?

Answer 1

• buyers and sellers dont have all of the information that they need to maximise their welfare
• prominent in real life
• leads to a form of market failure

Question 2

What is asymmetric information?

Answer 2

When either the buyer or seller has more information than the other

Question 3

What is Akerlofs lemons? (Give an example scenario)

Answer 3

• asymmetric information
• second hand car market
• buyers cant tell which cars are good quality and which are lemons
• so they offer low prices for all cars
• disincentivises sellers of good quality cars from selling

Question 4

What does Akerlofs lemons lead to?

Answer 4

• market failure
• sellers wont sell for low prices
• buyer wont bid up prices if they are unsure of the quality of the good

Question 5

How can we correct the market failure in the second hand car market?

Answer 5

• MOT
• guarantees
• history of the car

Question 6

What is the thrifting paradox?

Answer 6

• we want consumers to save money for old age
• also want them to spend their money now

Question 7

How has the UK government helped to solve the issue of asymmetric information when saving money for retirement?

Answer 7

• most young people don’t know enough information about retirement, and therefore don’t save enough money
• UK = we pay national insurance, which automatically enrols us in an occupational pension scheme

Question 8

What is the principal agent problem?

Answer 8

• the principal benefits from a good (students benefit from education)
• the agent makes the decisions to provide that good (teachers or government)
• the principal is unaware of how beneficial this good is, and suffers asymmetric information