2.2

• Symmetric information definition

  Consumers and producers have perfect market information to make their decisions. Leads to efficient allocation of resources
• asymmetric information definition

  when one party to a market transaction possesses less information relevant to the exchange than the other
• what is adverse selection?

  Asymmetric information
• what does asymmetric information lead to?

  market failure
• asymmetric information can be linked with the principal-agent problem
• what is imperfect information ?

  Occurs when all parties in a transaction do not have full or accurate information, learn to suboptimal economic decisions
• asymmetric information is a form of imperfect information
• what are the common causes of information failure ?

  • complexity of information
  • misleading advertising
  • addiction
  • habitual behaviour
  • lack of awareness
• how does imperfect information lead to market failure?

  can lead to misallocation of resources, overconsumption of demerit goods, underconsumption of merit goods, and exploitation of markets
• what is adverse selection ?

  a situation where one party takes advantage of asymmetric information, such as selling a used car with hidden defects
• what is moral hazard?

  when one party takes risks because they do not bear the full consequences, often due to asymmetric information, like insured individuals taking greater risks
• how can governments address imperfect information?

  through regulation, proving information, education campaigns, and enforcing standards to ensure transparency
• why is perfect information important in markets?

  ensures that resources are allocated efficiently, and consumers and producers make optimal decision