Asymmetric Information

Asymmetric Information

When one party in an economic transaction has more or better information than the other, leading to decisions that may result in an inefficient allocation of resources

Adverse Selection

A consequence of Asymmetric information, adverse selection occurs where the less informed party cannot distinguish between high quality and low quality goods and services, forcing them to make decisions based on average expectations rather than true quality.

Moral Hazard

A consequence of Asymmetric information, moral hazard occurs when one party is able to take risks without facing the full consequences of their actions because someone else bears the cost.

Mandating Disclosure (Government Responses Legislation and regulations)

Ensuring buyers receive accurate and complete information on the goods and services they purchase.

Setting minimum quality standards (Government Responses Legislation and regulations)

preventing low-quality goods from dominating the market

Provision of Information (Government Response)

provision or funding of information directly to help consumers and producers make better informed decision, reducing the information gap, especially when individuals cannot easily access the quality themselves

Private Responses: Signalling

Occurs when the more informed party voluntarily provides credible and costly information to demonstrate quality or reliability.

Private Responses: Screening

When the less informed party takes action to elicit or verify information about the other party, aiming to reduce the risk of making decisions based on uncertainty.