Information Gaps – Symmetric & Asymmetric Information – AS/A LEVELS/IB/IAL
Information Gaps – Symmetric & Asymmetric Information – AS/A LEVELS/IB/IAL
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Symmetric & Asymmetric information
Symmetric Information
This occurs when the buyer and seller have the same information.
Asymmetric Information
This occurs when the buyer or seller has more information than the other.
Examples of Asymmetric Information
- Second hand car sales – this occurs because the second hand car salesman knows more about any problems the car might have than the potential customer. This is also known as the lemon market.
- Insurance – customers may withhold information about themselves from the insurance company to ensure they are not deemed to be a risky customer.
- Mortgages – banks might know the client is at a high risk of defaulting on their mortgage before selling to them.
How Imperfect market information may lead to misallocation of resources
- Consumers – may end up paying too much / too little for a product
- Firms – may produce the incorrect amount of good / service or may exploit their consumers by overcharging them
- Lack of informed decisions – Imperfect market information may also lead to a lack of informed decisions being made with the appropriate resources
- Moral Hazard – asymmetric information may lead to party with superior knowledge altering their behaviour to favour themselves while disadvantaging the party with inferior knowledge
Additional Content – AQA Spec
The Importance of information
Symmetric Information leads to an efficient allocation of resources as consumers and producers have perfect market information to make their decision
Asymmetric Information may lead to a misallocation of resources where consumers could end up paying a higher price for a product and firms produce too little of a quantity
Importance of Asymmetric Information
- Market Failure – asymmetric information can lead to market failure and a misallocation of resources if one party knows more information than the other, and can use this to their advantage
- Principle-agent problem – this occurs when the agent makes decisions for the principle, acting in his / hers own interest – rather than the principal’s
Quick Fire Quiz – Knowledge Check
1. Define ‘Symmetric Information’ (2 marks)
2. Define ‘Asymmetric Information (2 marks)
3. Identify three examples of where Asymmetric Information may occur (3 marks)
4. Using an example, explain how Asymmetric Information may occur (4 marks)
5. Using a different example, explain how Asymmetric Information may occur (4 marks)
6. Explain how imperfect information may lead to a misallocation of resources (8 marks)
Next Revision Topics:
- Market Equilibrium
- Demand
- Supply
- Price Mechanism
- Price Determination
A Level Economics Past Papers
