1.3.4 Information Gaps

Question 1

What is information failure?

Answer 1

Information failure occurs when people have inaccurate, incomplete, uncertain or misunderstood
data and so make potentially ‘wrong’ or sub-optimal choices.

Question 2

How are information gaps caused?

Answer 2

• Misunderstanding the true costs/benefits: E.g. the side effects of using tanning salons or painkillers
• Uncertainty about costs and benefits e.g. should younger workers be buying into pension schemes when we can only guess at conditions in 40 years’ time?
• Complex information when buying specialist products
• Inaccurate or misleading information - persuasive advertising may ‘oversell’ the benefits of a product leading to more consumption than is optimal. Spam mail can be a cause of misinformation for consumers.
• Addiction e.g. drug addicts may be unable to stop consumption of harmful substances
• Lack of awareness - a good example here is that of tuition fees in Britain - many parents and students find the system of university finance difficult to understand
• Habitual purchase - buying goods simply out of habit e.g. reordering the same items in an online grocery shop because consumers are presented with their ‘favourites’ list when they log on

Question 3

What must there be for markets to work?

Answer 3

For markets to work, there needs to be symmetric information i.e. consumers & producers have the
same knowledge about products, they know everything there is to know about the effects of
consuming them

Question 4

What is asymmetric info?

Answer 4

Asymmetric information is when there is an imbalance in information between buyer and seller which
can distort choices

Question 5

What are examples of asymmetric information include?

Answer 5

• Landlords who know more about their properties than tenants
  o This allows landlords to extract higher rent payments from tenants
• Car insurance companies cannot tell the risks associated with selling premiums to each driver – they
  have to pool risks and assign premiums to groups of drivers based on assessed risk-factors
  o Some very safe drivers may pay higher insurance premiums than they really need to
• Some students have superior knowledge about how to get into the elite / best universities including
  which prior courses to take
  o This can perpetuate inequality and reduce social mobility
• Doctors have superior knowledge about drugs and treatments
  o In a private healthcare system, such as that in the US, this may lead doctors to overprescribe
  expensive and sometimes unnecessary treatments
• A used-car seller knows more about vehicle quality than a buyer
  o The buyer may pay too much for their car
• Insider information of traders in financial markets

Question 6

Show the impact of info gaps on markets

Answer 6

Question 7

What are merit goods?

Answer 7

These goods are better for people than they realise – the MPB is higher than realised.
This leads to under-consumption