Imperfect Information w/Decision Making

• According to traditional economic thought, consumers will look to maximize their utility where marginal utility is equal to zero or when there are prices for goods and services where marginal utility is equal to that price
• In the real world, something can break down where consumers don't make rational utility maximizing decisions
• Imperfect information


  Information that can prevent consumers acting in a rational utility maximizing way
• Ways information can be imperfect

  • Lack of information
  • Information not presented clearly
• Lack of information


  Can lead to over-consumption or under-consumption where consumers make irrational decisions
• Merit goods are under-consumed because there is a lack of information regarding how good those products are for the individual consumer
• Demerit goods are over-consumed because there is a lack of information or the information is not clearly presented about how bad consuming these goods is for the individual consumer
• Asymmetric information


  Information exists and is perfect, but it is not being shared equally between two parties
• Asymmetric information in labor markets


  • Employer lacks information about worker's productivity, skills, work ethic
• Asymmetric information in second-hand car markets


  • Seller has information about car's condition, buyer lacks this information
• Asymmetric information in insurance markets

  • Car driver knows their level of risk, insurance company lacks this information
• Moral hazard


  When an individual is gaining insurance but is not actually bearing the cost of taking risk, the insurance company bears the cost, which may lead the individual to take more risks
• Imperfect information can lead to irrational decisions being made where utility is not necessarily being maximized