Market Failure: Asymmetric Information

Question 1

When does asymmetric information occur?

Answer 1

when one economic agent has more knowledge about an economic transaction than the other.

Question 2

what are the consequences of asymmetric information?

Answer 2

• adverse selection
• moral hazard

Question 3

what is adverse selection?

Answer 3

his happens when one party (usually the buyer or seller) lacks key information about the product or service, leading to poor decisions.

Question 4

what is moral hazard?

Answer 4

occurs when one party takes more risks because they know they won’t fully bear the consequences of those risk

Question 5

what is an example of moral hazard?

Answer 5

If a person has full insurance coverage, they may be less careful about their health or property because they know the insurer will cover any damages or losses (bad for insurer).

Question 6

What are government responses to asymmetric information?

Answer 6

• Pass laws that make transactions more transparent.
• Ensure firms provide more information about their products

Question 7

What are private responses to asymmetric information?

Answer 7

• offer warranties and free refunds
• Try to find out more information about the other party in the transaction.