imperfect information

• what is one assumption in the free market?

  • One of the assumptions of free markets is that there is a perfect flow of information
  • This would include information on pricing, the availability of substitutes, the truthfulness of the product claims, etc  
• what exists in all free markets causing market failure?

  Information gaps exist in nearly all free markets and distort market outcomes, resulting in market failure
• what is perfect information?

  • Perfect information in the market means that buyers and sellers have exactly the same level of information about the good or service. This is called symmetric information
• what is asymmetric information?

   buyers and sellers have different levels of information.
• how does asymmetric information lead to over/under provision of goods?

   Asymmetric information distorts socially optimal prices and quantities in markets, resulting in over or under-provision of goods or services

  e.g For example, goods/services with dangerous side effects would be sold in lower quantities if buyers were aware of these effects (consider the VW emissions scandal). Fewer factors of production should be allocated to producing these.