What is asymmetric information?

• What is asymmetric information?:

  • Asymmetric Information occurs when either the seller or the buyer has more information than the other party in a transaction
• Adverse selection: When buyers have better information about their own characteristics than sellers do.
• The problem with adverse selection is that it leads to market failure because people who are high risk will be attracted by low prices while those who are low risk will not want to pay higher premiums so they won't buy insurance at all.
• Insurances would charge every consumer higher prices due to the lack of information of who is a good or bad driver therefore drivers are unwilling to purchase insurance even though buying insurance increase social surplus
• Moral hazard: This is where consumers change their behaviour once they have purchased something as they know they are protected from any negative consequences.
• An example of moral hazard is car insurance. Once someone buys car insurance they may drive recklessly knowing that if there was an accident then they wouldn’t suffer financially.