Imperfect Information

• Economic efficiency is likely to be the greatest when information is comprehensive, accurate and cheaply available. Expending resources to collect and verify information is, however, costly.
• When under-consumption arises from imperfect information, it is usually due to consumers' lack of awareness of the full extent of benefits of a certain good, and may underestimate the benefits of consuming the good. This would result in MPBperceived < MPBactual.
• Consumers will only consume up to the private equilibrium level, Qp, where MPBper = MPC, even though the socially optimum quantity, Qs, where MSB = MSC, is greater.

  
• The under-consumption of QpQs results in the loss of additional benefits to society, Qp Qs b c, and allows society to avoid addition costs, Qp Qs b a.

  
• Since Qs > Qp, the good is under-consumed, which causes deadweight loss, a b c, to arise.

  
• When over-consumption arises from imperfect information, it is usually due to consumer's lack of awareness of the full extent of harm a certain good causes, and may overestimate the benefits of consuming the good. This would result in MPBperceived > MPBactual.
• Consumers will consume up to the private equilibrium level, Qp, where MPBper = MPC, even though the socially optimum output, Qs, where MSB = MSC, is smaller.

  
• Due to the over-consumption of QsQp, society has to bear a cost, Qs Qp c a, which is greater than the benefits, Qs Qp b a.

  
• Since Qs < Qp, the good is over-consumed, which causes deadweight loss, a b c, to arise.

  
• Asymmetric information is a situation in which one party has more information than the other party regarding the characteristics of the goods and services for sale. This will result in a distortion of incentives and lead to inefficient market outcomes.
• Adverse selection arises when products of different qualities are sold at a single price because buyers/sellers are insufficiently informed to determine the true quality at the time of purchase.
• Adverse selection would result in too much of the low-quality product and too little of the high-quality product to be sold at the marketplace, and eventually, the market for the lowest quality group of good to prevail.
• Moral hazard describes the tendency to change behaviour when the cost of that behaviour will be borne by the other party.
• Supplier-induced demand is the demand for a product that is manipulated by the supplier to be above the actual demand in hopes of earning a larger profit per transaction.
• Efficiency wage theories explain the failure of wages to fall to enable unemployed workers to be hired. This is due to firms having imperfect information about worker productivity and leads to real-wage unemployment.
• Due to imperfect information in the labour market:

  • Workers are not fully aware of the types of jobs available
  • Employers are not fully informed of the type of labour available

  And thus, frictional unemployment occurs.