MF- Information Failures

Question 1

When does information failure occur

Answer 1

When people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially ‘wrong’ choices

Question 2

Examples of information failure

Answer 2

Pensions, stock market, borrowing and debt

Question 3

Key issue of information failure

Answer 3

Is whether the information failure is trivial or whether it has a big effect on individuals, their families and society as a whole

Question 4

Government intervention?

Answer 4

They may be a case for the government to intervene in a market in some way if information failures become serious and persistent.

Question 5

Causes of information failure

Answer 5

• misunderstanding of the true costs/benefits
• uncertainty about costs/benefits
• complex information
• inaccurate/misleading information
• addiction
• lack of awareness

Question 6

For markets to work

Answer 6

There needs to be symmetric information- consumers and producers have to know everything

Question 7

What market has plenty of asymmetric information

Answer 7

Used car market- potential buyers of a vehicle know less than the seller about the cars quality

Question 8

What is moral hazard

Answer 8

When insured consumers are likely to take greater risks, knowing that a claim will be paid for by their cover.
The consumer knows more about their intended actions than the producer.

Question 9

What is adverse selection

Answer 9

Health insurance: those most likely to purchase health insurance are those who are most likely to use it e.g. Smokers.

The insurance company knows this and raises the average price, this prices healthy consumers out of the market.