1.3.4 Information Gaps

• Symmetric information


  Consumers and producers have perfect market information to make their decision
• Symmetric information


  Leads to an efficient allocation of resources
• Asymmetric information


  Unequal knowledge between consumers and producers
• Asymmetric information


  Leads to market failure
• Asymmetric information


  • Car dealer knows about a fault with the car that the consumer is unaware of
  • Consumers know more information than the producer when purchasing insurance policies
• Asymmetric information


  Leads to a misallocation of resources
• Misallocation of resources due to asymmetric information


  • Consumers might pay too much or too little
  • Firms might produce the incorrect amount
  • Monopolies might exploit the consumer by charging them more than they need to
• Principal-agent problem


  The agent makes decisions for the principal, but the agent is inclined to act in their own interests, rather than those of the principal
• Principal-agent problem


  • 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
• Imperfect information


  Information is missing, so an informed decision cannot be made
• Imperfect information


  Leads to a misallocation of resources
• Information


  • Can be made more widely available through advertising or government intervention
  • The harmful effects of smoking could be made public through adverts and messages on cigarette boxes