LS19- Information Gaps

Question 1

How do information gaps lead to market failure?- chain of analysis

Answer 1

Free markets assume information is perfect thus consumers, producers and government will make rational decisions to maximise their benefit. However, if there are information gaps, decisions will be made based on imperfect information or ignorance. As a result, consumers may consume too much of an unhealthy good due to effective advertising.

The end result is consumers making irrational decisions, either under or over consuming where their total benefit is not being maximised. Therefore, too few or too many resources are being allocated to such markets causing a misallocation of resources, allocative inefficiency and market failure.

Question 2

Perfect knowledge

Answer 2

When a buyer and/or seller has a complete understanding of the quality and nature of a good or service.

Question 3

Symmetric knowledge

Answer 3

When buyers and sellers have equal amounts of knowledge about a good or service.

Question 4

Imperfect knowledge

Answer 4

When a buyer and/or seller lacks a complete understanding of the quality and nature of a good or service.

Question 5

Asymmetric information

Answer 5

When a buyer or seller has more information about a good or service than the other party.

Question 6

Information gap

Answer 6

When either the buyer or seller does not have access to the information needed for them to make a fully-informed decision.