4.1.8.6 Market imperfections

Question 1

what is symmetric information?

Answer 1

Symmetric information means that consumers and producers have perfect market information to make their decision.

This leads to an efficient allocation of resources.

Question 2

What is asymmetric information?

Answer 2

This is when there is unequal knowledge between consumers and producers.

could lead to a misallocation of resources.

Question 3

Why asymmetric information can lead to market failure.

Answer 3

this leads to a misallocation of resources because consumers might pay too much or too little, and firms might produce the incorrect amount.

For example, monopolies might exploit the consumer by charging them more than they need to.

Question 4

Why imperfect information can lead to market failure.

Answer 4

there will be information missing, so an informed decision cannot be made which leads to market failure.

Question 5

Why the existence of monopoly and monopoly power can lead to market failure?

Answer 5

Monopolies could exploit the consumer by charging them higher prices.This means the good is under-consumed, so consumer needs and wants are not fully met.This loss of allocative efficiency is a form of market failure.

Question 6

what are the 2 main types of factor immobility

Answer 6

geographical and occupational immobility

Question 7

Geographical immobility

Answer 7

The geographical immobility of the factors of production refers to the obstacles which prevent the factors of production moving between areas.

Question 8

Why the geographical immobility of factors of production can lead to market failure

Answer 8

For example, labour might find it hard to find work due to family and social ties, the financial costs involved with moving, imperfect market knowledge on work and the regional variations in house prices and living costs across the UK.

Question 9

occupational immobility

Answer 9

The occupational immobility of the factors of production refers to the obstacles which prevent the factors of production changing their use.

Question 10

Why the occupational immobility of factors of production can lead to market failure

Answer 10

workers might find it difficult to change the occupation because they lack the skills needed to change occupation.

Question 11

What can asymmetric information be linked to

Answer 11

Asymmetric information can be linked with the principal-agent problem.

Question 12

principal-agent problem.

Answer 12

This is when the agent makes decisions for the principal, but the agent is inclined to act in their own interests, rather than those of the principal.

Question 13

Example of principal agent problem

Answer 13

For example, shareholders and managers have different objectives which might conflict. Managers might choose to make a personal gain, rather than maximise the dividends of the shareholders.