Information failure is when market failure happens because of asymmetric information,
information gaps or misinformation. Market failure is when there is a misallocation of
resources. Information failure is a type of market failure that occurs due to asymmetric
information and information gaps. This can be corrected by the government giving
consumers information about the market. An example of this market failure is car sellers
selling a 2nd hand car that has many hidden issues and the buyer not knowing these issues.
This means that consumers dont have full information about the car which means that
consumers suffer from asymetric infomation. This means that consumers consume at point
Q-P on the curve MPC, this is being under consumed as consumers don't know the actual
costs (MPC full info). (MPC full info) is higher than the MPC curve because consumers suffer
from asymmetric information or information gaps. This means that they are currently under
consuming. On the diagram the curve MPC price is at P which is a demerit good. This
means that we are over consuming the demerit good at point Q due to information failure.
Although , the curve (MPC full info) shows the actual price of the demerit good at P2 and
quantity Q2 which is much lower as this is having full information of the demerit good. When
the government intervene, it means that consumers have more information within the market
about the demerit goods so quantity demanded falls from Q to Q1. this means that the MPC
curve will shift to MPC + info. Therefore, the market failure has reduced as there is less over
consumption of demerit goods in the market.
Eval: however, the government has not fully corrected the market as we are over consuming
as if we had the full correct information we would be consuming at MPC (full info) shown on
the diagram.
information gaps or misinformation. Market failure is when there is a misallocation of
resources. Information failure is a type of market failure that occurs due to asymmetric
information and information gaps. This can be corrected by the government giving
consumers information about the market. An example of this market failure is car sellers
selling a 2nd hand car that has many hidden issues and the buyer not knowing these issues.
This means that consumers dont have full information about the car which means that
consumers suffer from asymetric infomation. This means that consumers consume at point
Q-P on the curve MPC, this is being under consumed as consumers don't know the actual
costs (MPC full info). (MPC full info) is higher than the MPC curve because consumers suffer
from asymmetric information or information gaps. This means that they are currently under
consuming. On the diagram the curve MPC price is at P which is a demerit good. This
means that we are over consuming the demerit good at point Q due to information failure.
Although , the curve (MPC full info) shows the actual price of the demerit good at P2 and
quantity Q2 which is much lower as this is having full information of the demerit good. When
the government intervene, it means that consumers have more information within the market
about the demerit goods so quantity demanded falls from Q to Q1. this means that the MPC
curve will shift to MPC + info. Therefore, the market failure has reduced as there is less over
consumption of demerit goods in the market.
Eval: however, the government has not fully corrected the market as we are over consuming
as if we had the full correct information we would be consuming at MPC (full info) shown on
the diagram.
