1.3.4 - Information gaps Flashcards
(9 cards)
What is symmetric information?
For markets to work best, needs to be symmetric information so consumers and producers have the same level of knowledge about the products, as they know everything about them.
What is asymmetric information?
Asymmetric information occurs when somebody know more than somebody else in the market. Imbalance can distort chocies.
What is information failure?
Information failure occurs when individuals have inaccurate data so make the wrong choices
The key issue is whether the information failure is trivial or if it has a big effect on individuals and their families or society in which case the government may intervene.
What are the causes of information failure
Misunderstanding the true costs/benefits: like the side effects of consumption of certain goods or services
Uncertainty about costs and benefits: The idea of buying into a pensions scheme as a young member of the labour force.
Inaccurate or misleading information: Persuasive advertising may oversell the benefits of a products leading to more consumption than is optimal.
Addiction: Addicts are unable to stop consumption of harmful substances
Lack of awareness - like tuition fess understanding how university finance works
Habitual purchase - buying goods simply out of habit.
What are examples of information gaps?
Risks from using a tanning salon
Addiction to painkillers and other drugs
Gaining entry to elite degree courses
Complexity of pension schemes.
What are some examples of asymmetric information?
Landlord knows more about their properties than tenants allowing them to extract higher rent payments.
Car insurance companies cannot tell the risk associated with selling premiums to each driver they have to pool risks and assign premiums to groups of drivers.
Some students have superior knowledge about how to get into elite universities.
What is the diagrammatic analysis of information gaps and market failure?
Individuals may have imperfect information about their own private benefits.
If they had better information on the benefits to themselves of consuming a good or service, the marginal private benefit curve would shift lower leading to a smaller equilibrium quantity.
What are merit goods?
Merit goods are good which are better for people than they realise the MPB is higher than realised.
Demerit goods are good which are worse for people than they realise the MPB is less than realised leads to over consumption.
What are some government policies to correct information failure?
Force producers to give accurate information: compulsory labelling on products, improved nutritional information
Campaigns: Hard-hitting anti-speeding advertising to reduced the number of road accidents. Campaigns on the danger of gambling addictions.
Pass laws: Consumer protection laws the right to refund faulty goods or to return goods that have been wrongly sold.
Force the publication of data: Performance league tables for schools or company accounts.
Establish regulators and industry standards: Advertising standards association ‘honest, decent, truthful’.
