Information gaps
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Transcript of Information gaps
Information Gaps
EdExcel Economics 1.3.4
What is meant by Information Failure?
• In competitive markets, it is assumed there is perfect information – i.e. consumers and producers have full knowledge about prices, benefits and costs of the goods and services available.
• There are many causes of information failure1. Long-term consequences: Information gaps about long term benefits
of costs of consuming a product e.g. consumption of legal highs2. Complexity: Information failure when a product is highly complex e.g.
understanding the best pension product to buy (if at all!)3. Unbalanced knowledge: i.e. when the buyer knows more than the
seller, or the seller knows more than the buyer4. Price information: When consumers are unable to quickly / cheaply
find sufficient information on the best prices for different products
Information failure occurs when people have inaccurate or incomplete data and so make potentially ‘wrong’ choices / decisions
Examples of Information Failure
In nearly every market we find instances / risks of information gaps
Risks from using tanning salons
Addiction to painkillers & other
drugs
Gaining entry to elite degree
courses
Complexity of pension schemes
Uncertain quality of second hand
products
Knowledge of the nutritional content
of foods
Cowboy builders or other “rip-off
merchants”
Tourist Bazaars or buying and selling
antiques
Information Gaps & Market Failure
Costs, Benefits
£s
Output / quantity
MPC
P1
Q1
MPB (limited information)
P2
Q2
Individuals may have imperfect information about their own private benefits. If they had better information on the benefits to themselves of consuming a good or service, the marginal private benefit curve would shift outwards leading to a higher equilibrium quantity
MPB (fuller information)
Market demand would be higher if consumers had better information
Obesity Rates in Selected Countries in 2014
Saudi Arabia
United States
Germany
China
India
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%
69.4%
67.4%
61.1%
28.3%
19.5%
Percentage of the populationSource: University of Washington
According to the latest data for the UK, 25% of adults in England are obese. A further 37% are overweight. Obesity is normally defined as having a BMI of 30+
Asymmetric Information in Markets
1. Landlords who know more about their properties than tenants2. Mortgages: A borrower knows more about their ability to repay a
loan than the lender, insufficient checks might be made3. Car insurance companies cannot tell the risks associated with
selling premiums to each single driver – they have to pool risks4. Some students have superior knowledge about how to get into the
elite / best universities including which prior courses to take5. Doctors have superior knowledge about drugs and treatments 6. A used-car seller knows more about vehicle quality than a buyer7. Insider information of traders in financial markets8. Information advantages for high-frequency stock market traders
Asymmetric information is when there is an imbalance in information between buyer and seller which can distort choices
Moral Hazard and Adverse Selection
These are two aspects of asymmetric information in insurance markets
• Moral Hazard• Moral hazard occurs when insured consumers are likely to take
greater risks, knowing that a claim will be paid for by their cover• The consumer knows more about his/her intended actions than
the producer (insurer)• Adverse Selection
• Health insurance: those most likely to purchase health insurance are those who are most likely to use it, i.e. smokers/drinkers/those with underlying health issues
• The insurance company knows this and so raises the average price of insurance cover
• This prices healthy consumers out of the market, meaning that only high risk individuals gain insurance – a market failure
Policies for Addressing Information Failures
1. Compulsory labelling on products (cigarettes)2. Improved nutritional information (labelling
systems) on food & drinks3. Hard-hitting anti-speeding advertising to
reduce the number of road accidents4. Campaigns to raise awareness of the risks of
drink-driving / drug abuse5. Campaigns on dangers of gambling addiction6. Performance league tables for schools7. Consumer protection laws e.g. right for
refunds of faulty goods8. Industry standards / guarantees for selling
used products such as second hand cars
Government action can improve information to help consumers and producers value the actual cost and/or benefit of a good or service.
Everyone quits eventually
Stick to the speed limit
Information Economics: Car Insurance Market
• In 2012, there were 30 million motor insurance policies in the UK
• From 2008 through to 2011 there was a surge in insurance premium costs
Consumer price index for vehicle insurance
Index of insurance costs, 2005 = 100
2008 105.0
2009 115.8
2010 151.5
2011 186.8
2012 188.1
2013 185.1
What factors might explain the rise in car insurance premiums?1. Increasing number of fraudulent
claims e.g. for whiplash injuries2. Rising volume of claims linked to
increased car ownership and traffic congestion
3. More claims from personal injury lawyers & car hire firms
Significance of high insurance prices1. Higher premiums cut into
disposable incomes of motorists2. Rise in the number of people
who choose to drive uninsured3. Younger drivers badly affected –
many annual premiums exceed the market value of the vehicle
Factors Influencing Buyers of Used Cars in the UK
What most strongly influences the type of used car you would consider buying?
Personal experience make/modelViews family friends
TestdriveInternet shopping/consumer sites
Classified used car websitesConsumer reports
Used car showrooms/sitesCars on street
Motoring magazinesDealer websites
Car TV showsDealer advice
Car manufacturer advertsFacebook/twitter
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%28%
26%16%16%
11%10%10%
9%7%
6%4%4%4%4%
Share of respondents
The used car market has plenty of asymmetric information because potential buyers of a vehicle know less than the seller about the car’s quality.
Information Gaps
EdExcel Economics 1.3.4