Imperfect market knowledge

Symmetric information

In the study of competitive markets it is often assumed that consumers and producers have perfect market information upon which to make their economic decisions. This is known as symmetric information – where consumers and producers have perfect and equal market information on a good or service. Assuming that consumers and producers act in a rational way, it will leas to an efficient allocation of resources.

Asymmetric information

In reality, consumers and producers have imperfect and unequal knowledge upon which to base their economic decisions, and this could lead to a inefficient allocation of resources, or market failure. This is known as asymmetric information.

Often producers may know more than consumers about a good or service. A second-hand car salesman, for example, may have a greater knowledge of the history of the vehicles for sale, as well as more technical knowledge than the consumer. This could lead to the consumer paying too much for a poor-quality car.

Sometimes consumers may have more market information than producers. For example, a consumer may purchase an insurance policy concealing information about himself or simply know more about his intended actions. This might include a risky lifestyle.  This is why insurance salesmen cover their backs by selling insurance policies at huge prices to young drivers, because they assume asymmetric information and factor that into their pricing.

When there is imperfect market information, markets are likely to fail. This can be seen in the under-consumption of healthcare, education and pensions (sometimes known as merit goods) or the over-consumption of tobacco, alcohol and gaming (sometimes known as demerit goods).

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