Imperfect information

Question 1

What is information failure?

Answer 1

• A type of market failure where consumers or producers:
• Do not have symmetric information.
• Have asymmetric information.
• This can lead to the misallocation of resources as one party in a transaction has greater information than another, so not all economic agents are able to make informed decisions.

Question 2

What is symmetric information?

Answer 2

• When all the relevant information is known by both parties.

Question 3

What is information asymmetry?

Answer 3

• Occurs when some parties in a transaction have more information regarding the product than others.

Question 4

What is the concept ‘perfect knowledge’?

Answer 4

• A theoretical concept when occurs when all consumers in a market are fully aware of price, quantity available and other relevant information for all products when making buying decisions.

Question 5

What is the significance of asymmetric information?

Answer 5

• Markets are unable to operate efficiently if economic agents do not have appropriate information.
• In reality, economic agents never have perfect information, one party is likely to have more information than the other.
• Economic agents are unable to undertake rational decision making unless they have the information required to make these decisions.
• Therefore, free markets are likely to misallocate resources.