Imperfect information

Why is information important?

It is essential for making sound economic decisions

What is imperfect information?

A lack of information

What happens when there is imperfect information

It is impossible for economic agents to properly evaluate costs and benefits and make informed choices

How can imperfect information lead to market failure?

It causes a distortion of the market with an inefficient and unequal misallocation of resources

Information gaps - definition

When people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially wrong choices in markets 

Why are information gaps/ failure inevitable

In a world of product complexity there is the paradox of choice

What is the paradox of choice 

Choice overload distorts out decisions - most people have bounded rationality/ self contro

How does fake news and misleading advertising affect information gaps?

They damage consumer sovereignty and lead to a loss of allocative efficiency

Asymmetric information - definition

When somebody knows more than someone else in the market

Example of market where buyer knows more than seller

Health insurance, antiques

Example of market where seller knows more than buyer 

Pharmacy prescriptions, used car 

Imperfect information: graph of over estimating benefits

- Individuals may have imperfect info. about their own private benefits

- If they had fuller info on the benefits to themselves of consuming, the MPB would shift left would leading to an equilibrium with a lower quantity demanded.

Imperfect information: Graph of underestimating costs

• If consumers had more info, MPC would shift leftward as they currently under estimate the impact of consumption decisions on them

  • This means market demand would be lower with better information