MICROECONOMICS WRITTEN REPORT
7.3 Information Failures
- Another and a subtler type of market failure a type of market failure where
individuals or firms have a lack of information about economic decisions.
- Results when either buyers or sellers have incomplete or inaccurate information and
their cost of obtaining better information is prohibitive.
- A market failure occurs because of asymmetric information
What is asymmetric information?
- unequal knowledge possessed by the parties to a market transaction.
o For example:
the seller of a car may know it has some problem, but the buyer may
not be aware.
when you try to buy something online, some sellers put a sale for some
furniture for let’s say 200php, but when you received it turns out that it
was some furniture for a doll house
Asymmetric information between sellers and buyers can cause markets to fail. Private markets
may under allocate resources to a particular good or service for which there is a severe moral
hazard problem.
Moral hazard
- occurs when individuals alter their behavior because of certain guarantees.
o For example, an insurance firm may be willing to offer insurance against a
bike being stolen. However, the firm may not realize that through offering
an insurance, it alters consumer behavior and, after gaining insurance, the
consumer takes less care to lock it up. Therefore, the insurance company
loses out because it is more likely to pay out than previously expected.)
Another information problem resulting from inadequate information about buyers is the adverse
selection problem.
Adverse Selections
- This problem occurs when one party to a contract or agreement takes
advantage of the other party’s inadequate information, resulting in an
unanticipated loss to the latter party.
- This again, occurs when there is an asymmetric information between buyers
and sellers. This unequal information distorts the market and leads to market
failure.
- It is when a party takes advantage of the other party before an agreement. This
is common in insurance companies. An example of it is a situation in which
, an applicant obtains insurance coverage based on providing a residence
address in an area with a very low crime rate when the applicant actually lives
in an area with a very high crime rate is an example of adverse selection in an
auto insurance. When the applicant's vehicle is regularly parked in a high-
crime area, the risk of it being stolen, vandalized, or otherwise damaged is
obviously much higher than if the vehicle is regularly parked in a low-crime
area. On a smaller scale, if an applicant claims that the vehicle is parked in a
garage every night when it is actually parked on a busy street, adverse
selection may occur.
Normally, there is enough market information to ensure that goods and services are produced
and purchased efficiently. However, in some cases, insufficient information makes it difficult to
tell the difference between trustworthy and untrustworthy sellers or buyers. The government
should intervene by increasing the information available to market participants because society's
scarce resources may not be used efficiently in these markets. In rare situations, the government
may provide a good for which efficient production has been hindered by information problems.
Some tips to reduce the incidence of asymmetric information, is for example, when you will go
to visit hotels and restaurants – you should first look at online reviews to have a better idea of
what to expect. Same goes to online marketplaces like Shopee or Lazada, sellers rely on good
reviews. So, they would only sell goods which are correctly marketed.
7.4 Government’s Role in the Economy
Market Failure Government Intervention
Can Justify
Due to private-sector firms' inability to break even when attempting to provide public
goods, as well as over- and underproduction issues caused by positive and negative externalities,
government can play an important role in allocating society's resources efficiently to the goods
and services that people most desire.
However,
Is not an
Correcting for market failures Easy task
To begin with, government officials must
correctly identify the existence of any market failure as well as the,
cause
That could be,
difficult,
time-consuming, and,
7.3 Information Failures
- Another and a subtler type of market failure a type of market failure where
individuals or firms have a lack of information about economic decisions.
- Results when either buyers or sellers have incomplete or inaccurate information and
their cost of obtaining better information is prohibitive.
- A market failure occurs because of asymmetric information
What is asymmetric information?
- unequal knowledge possessed by the parties to a market transaction.
o For example:
the seller of a car may know it has some problem, but the buyer may
not be aware.
when you try to buy something online, some sellers put a sale for some
furniture for let’s say 200php, but when you received it turns out that it
was some furniture for a doll house
Asymmetric information between sellers and buyers can cause markets to fail. Private markets
may under allocate resources to a particular good or service for which there is a severe moral
hazard problem.
Moral hazard
- occurs when individuals alter their behavior because of certain guarantees.
o For example, an insurance firm may be willing to offer insurance against a
bike being stolen. However, the firm may not realize that through offering
an insurance, it alters consumer behavior and, after gaining insurance, the
consumer takes less care to lock it up. Therefore, the insurance company
loses out because it is more likely to pay out than previously expected.)
Another information problem resulting from inadequate information about buyers is the adverse
selection problem.
Adverse Selections
- This problem occurs when one party to a contract or agreement takes
advantage of the other party’s inadequate information, resulting in an
unanticipated loss to the latter party.
- This again, occurs when there is an asymmetric information between buyers
and sellers. This unequal information distorts the market and leads to market
failure.
- It is when a party takes advantage of the other party before an agreement. This
is common in insurance companies. An example of it is a situation in which
, an applicant obtains insurance coverage based on providing a residence
address in an area with a very low crime rate when the applicant actually lives
in an area with a very high crime rate is an example of adverse selection in an
auto insurance. When the applicant's vehicle is regularly parked in a high-
crime area, the risk of it being stolen, vandalized, or otherwise damaged is
obviously much higher than if the vehicle is regularly parked in a low-crime
area. On a smaller scale, if an applicant claims that the vehicle is parked in a
garage every night when it is actually parked on a busy street, adverse
selection may occur.
Normally, there is enough market information to ensure that goods and services are produced
and purchased efficiently. However, in some cases, insufficient information makes it difficult to
tell the difference between trustworthy and untrustworthy sellers or buyers. The government
should intervene by increasing the information available to market participants because society's
scarce resources may not be used efficiently in these markets. In rare situations, the government
may provide a good for which efficient production has been hindered by information problems.
Some tips to reduce the incidence of asymmetric information, is for example, when you will go
to visit hotels and restaurants – you should first look at online reviews to have a better idea of
what to expect. Same goes to online marketplaces like Shopee or Lazada, sellers rely on good
reviews. So, they would only sell goods which are correctly marketed.
7.4 Government’s Role in the Economy
Market Failure Government Intervention
Can Justify
Due to private-sector firms' inability to break even when attempting to provide public
goods, as well as over- and underproduction issues caused by positive and negative externalities,
government can play an important role in allocating society's resources efficiently to the goods
and services that people most desire.
However,
Is not an
Correcting for market failures Easy task
To begin with, government officials must
correctly identify the existence of any market failure as well as the,
cause
That could be,
difficult,
time-consuming, and,
