Chapter 19: Information Gaps

  • Created by: Sin Heng
  • Created on: 21-11-19 13:16
  1. 1. Define 'asymmetric information' 

Where buyers either sellers have different amounts of information than the other. 


  1. 2. What is an example of asymmetric information? 

The market for second-hand items. The sellers know of the defaults in each product but consumers don't. 


  1. 3. How does asymmetric information lead to market failure? 

Seller set an average price on a second-hand good. Consumers may think that the price should be lower as the good is below average (it is used), they may bargain for a lower price which the sellers may be unhappy with  so they stop selling them in the market. This leads to the disappearance of the market. 


  1. 4. Define 'information failure'/'information gap' 

Where buyers, sellers or both do not have the information available to make decisions. 


  1. 5. Define 'imperfect information' 

Where buyers, sellers or both lack information to make informed decisions.


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