information failure

• Asymmetric information


  Leads to market failure
• Imperfect information


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


  Leads to a misallocation of resources
• Misallocation of resources


  • 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
• Information asymmetric

  Can result in moral hazard
• Information


  • Could be made more widely available through advertising or government intervention
• Demerit goods


  Associated with information failure, since consumers are not aware of the long run implications of consuming the good, and they are usually overprovided
• Demerit goods


  • Cigarettes and alcohol
• Demerit goods


  Cause negative externalities
• Negative externalities of demerit goods

  MPB>MSB, leading to deadweight welfare loss
• Merit goods


  Associated with information failure, because consumers do not realise the long run benefits to consuming the good, and they are underprovided in a free market
• Merit goods


  • Education and healthcare
• Merit goods


  Cause positive externalities
• Positive externalities of merit goods

  MSB>MPB
• The extent to which the market fails involves a value judgement, so it is hard to determine what the monetary value of an externality is
• Different individuals will put a different value on externalities, depending on their own experiences
• This makes determining government policies difficult
• asymmetric information is that some participants have better information about market conditions than others
• moral hazard where individuals have incentive to alter their behaviour when the risk in Bourne to others