lesson 18

Question 1

what is imperfect market information?

Answer 1

when buyers and sellers don’t necessarily have the information that they need to maximise their welfare

Question 2

when do information gaps exist?

Answer 2

when either buyer or the seller has more information than the other which is also referred to as asymmetric information

Question 3

george akerlof and akerlof’s lemons

Answer 3

• won a nobel prize for his analysis of the second hand car market
• the market for second hand cars fluctuate as we move through booms and recessions
• some cars had defects which he called lemons
• akerlof deduced that the second hand car market often fails since buyers don’t want to risk getting a lemon and sellers of quality cars don’t want to sell for too low
• to correct this market failure we would need buyers to have better information about which cars are quality and which are not

Question 4

information failure exists where…

Answer 4

• buyers lack the information to maximise their welfare
• sellers lack the information to maximise their welfare
• there is asymmetric information

Question 5

what can the government do to prevent information failure?

Answer 5

• introduce labelling laws
• run public information campaigns
• set advertising standards

Question 6

what can the government do to prevent information gap?

Answer 6

use information campaigns to narrow information gaps