4.1.2.2 IMPERFECT INFORMATION

Why is information important for consumers in a market?

Information is essential for consumers in a market because it empowers them to make smart choices, compare prices and quality, and avoid unfair treatment (this helps to overcome information gaps)

What are informed buyers encouraged to do?

Informed buyers choose the best businesses, which forces all companies to improve quality and lower prices (leading to market efficiency)

Summarize why rational behavior assumes full information

Rational behavior assumes full information so individuals can accurately weigh all costs and benefits to make the choice that maximizes their personal satisfaction or profit

What do most agents act out of?

Self interest

What is homo-economics?

A theoretical model in economics that describes humans as perfectly rational, self-interested agents who consistently make choices to maximize their utility or profit

What are 3 aspects to homo-economics?

Calculating every cost and benefits, can compute probabilities, feel no emotion or regret

Give an example of imperfect information when buying an electric car?

• not knowing how much it's likely to cost to maintain (as well as buying it)

With imperfect information, do people over or under consume merit goods?

Under consume

With imperfect information, do people over or under consume demerit goods?

Over consume

Give 2 examples of merit goods?

1. vaccinations/healthcare

2. education/training

Give 2 examples of demerit goods?

1. sugary drinks/fast foods

2. cigarettes/vaping

Why do people over consume demerit goods and under consume merit goods? (linking to imperfect information)

They tend to ignore the long term benefits and focus on the immediate pleasure

Do people over/under emphasize short term or long term benefits?

• over emphasize short term benefits

• under emphasize long term benefits

Does this mean consumers are more or less rational? (over emphasizing short term benefits)

Less rational with our economic decisions

A student may spend £100 on a gig but leave feeling she has wasted her time, how is this an example of imperfect information?

She made a rational choice based on the expectation that it would've been good - but made the wrong choice (based on imperfect information)

What are information gaps?

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

Give 4 examples of imperfect information

1. Risks from using tanning salons

2. Uncertain quality of secondhand products

3. Addiction to painkillers and other drugs

4. Addiction to computer gaming and energy drinks

What is asymmetric information?

This occurs when somebody knows more than somebody else in the market

What problem does asymmetric information lead to?

Adverse selection

When may a seller know more than a buyer?

Used car market (lemons), health and life insurance, real estate/rentals

When may a buyer know more than a seller?

Health/life insurance, antique and estate sales, second hand goods

What other type of insurance does the buyer know more than the seller?

Car insurance - customers know more about themselves/their driving habits than the insurance provider

How is asymmetric information linked to mortgages?

A borrower known more about their ability to repay a loan than a lender

Give 4 examples of asymmetric information

1. Used vehicles

2. Health insurance

3. Borrowers and lenders

4. Tenants and landlords

Describe the diagram

Describe the diagram

Who came up with the idea of "the market for lemons" in the second hand car market?

George Akerlof

What is the market for lemons?

A situation where the price may not reliably signal the quality of a product, such as second-hand cars

What is the main reason for people selling second hand cars?

Because there is something wrong with the car

Give George Akerlof and economics of information order

How can people overcome “the market for lemons”?

Get the AA to do a report, this removes asymmetric information, the buyer can then decrease the price accordingly

Give 2 ways that we can overcome the lemons problem

1. Require a full-service history including MOT test logs

2. Extended car warranties to lower risk of purchase

Give 5 examples of interventions to improve information

1. Health warnings

2. Nutritional labeling

3. Gamble aware

4. Industry standards

5. Consumer protection laws

What is the significance of information gaps/failure?

Fake news and misleading advertising damage consumer sovereignty and lead to a loss of allocative efficiency

What is bounded rationality?

The idea that humans have limited cognitive resources and are unable to make completely rational decisions (they must make decisions based on information available)

Give examples of “nudges” and “shoves”?

Nudges - recommendations

Shoves - taxes/penalties

Give a real world example of a shove?

Tax on the ULEZ zones in Bristol and London

What does consumer sovereignty mean?

Consumer surplus (power)

What is misinformation?

Passing on information that someone gently

believed was true, then they passed on, to find out it was wrong

Give an example of misinformation?

If a company believed they had X amount of sugar in their product, but this was wrong

What is disinformation?

When businesses purposely pass on incorrect information to manipulate consumers

Describe heuristics/rule of thumb

A quick mental shortcut that allows you to have a problem, or make decisions rapidly without doing a full, low analysis

If people use heuristics/rule of thumb, are they less or more rational?

Less rational - thinking slow

Give an example of heuristics/rule of thumb

Restaurants

• could research restaurants online (through customer reviews, ratings, health inspection scores, menu prices)

• BUT (the rule of thumb), if the restaurant is busy, people assume it must be good

Give another example of heuristics? (shopping)

Tesco online shopping - placing the same order again and again

Give an example of price-quality heuristic

Many consumers assume that higher-priced products are better quality

Give some other type of heuristics?

Familiarity, brand loyalty, availability

What are the irrational thoughts behind tanning salons?

People overestimate the short term benefits and underestimate the long term costs

What concept does “habitual purchase” link to?

Heuristics/rule of thumb