Information Failure Studen

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Information Failure Studen

  1. 1. AS Micro: Information Failure and Market Failure 1. Information failure occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially ‘wrong’ choices. 2. The key issue is whether the information failure is trivial or has serious social effects 3. There may well be a case for the government to intervene in the market in some way if information failures become serious. Understand some examples of information failure in markets Over-estimating private benefits of a product Under-estimating private costs of a product Myopia when making decisions Difficulties in handling complex information Misleading information Insufficient information Addiction
  2. 2. Key Concept: Asymmetric Information Asymmetric information happens when somebody knows more than somebody else in the market. This can make it difficult for the two people to do business together. In extreme cases, asymmetric information might prevent market transactions taking place at all. Examples of asymmetric information Who knows more in the market - the Buyer or the Seller? Examples 1. Dentists and their patients 2. People selling their house through an estate agent 3. People looking to buy life / health insurance policies 4. Economics teachers applying for a job at another school 5. A young couple applying for a mortgage on their first home 6. The used car market (market for second hand vehicles) 7. A divorced man enters the online dating market looking for a new relationship 8. Doctors are paid by pharmaceutical companies to make speeches on the effects of certain drugs Who Knows More – the buyer or the seller? Comment / Problem Arising from asymmetric information
  3. 3. Analysis of Information Failures as a cause of Market Failures With questions on information failure it is important to have good analysis diagrams to hand to use when discussing specific examples – here are two worth using: Consumers who over-estimate the private benefits of a consuming a product: Consumers who under-estimate the private costs of consuming a product:
  4. 4. Identifying and evaluating ways of overcoming information failures in markets Approaches to information gaps Real world example Evaluation comment Awareness campaigns Compulsory labelling Warranties / guarantees Compulsory screenings Service records Accreditation schemes Internet Price Comparison Web Consumer Reviews Behavioural nudges Excess payments for claims Blog articles on information failure (loads of good examples here): http://www.tutor2u.net/blog/index.php/economics/C184 Adverse selection Where the expected value of a transaction is known more accurately by the buyer or the seller due to an asymmetry of information; e.g. health insurance Asymmetric information When somebody knows more than somebody else in the market. Such asymmetric information can make it difficult for the two people to do business together Information failure Information failure occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially ‘wrong’ choices Moral hazard When people take actions that increase social costs because they are insured against private loss: sometimes it is called hidden action due to the agent’s actions being hidden from the principal Persuasive advertising Designed to manipulate consumer preferences and cause a change in demand Signalling Prices have a signalling function because the price in a market sends important information to producers and consumers
  5. 5. Examples of information failures / information gaps in markets

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