Consumers and producers have perfect market information to make their decision. This leads to an efficient allocation of resources.
Imperfect information
Refers to missing information in the market, meaning that an informed decision cannot be made. This causes a misallocation of resources, e.g. consumers paying too much or too little for a product, or firms producing the incorrect amount.
Imperfect information in monopolies
Monopolies might exploit their consumers by charging them a higher price than what they need to pay.
Asymmetric information
When there is unequal knowledge between consumers and producers. This causes a misallocation of resources and leads to market failure.
Examples of asymmetric information
E.g.1) A car manufacturer known about the flaws in its cars better than the consumer, who may end up paying a higher price than it's actual value.
E.g.2) Consumers may know more, such as when purchasing insurance policies.
Asymmetric information can be linked with the 'principal-agent' problem (divorce of ownership).
Information could be made more widely available through advertising or government intervention. E.g. harmful effects of cigarettes displayed on public adverts or on cigarette boxes.
