Microeconomics

Table of Contents

1. Topic pack - Microeconomics - introduction
2. 1.1 Competitive Markets: Demand and Supply
3. 1.1 Competitive Markets: Demand and Supply - notes
4. 1.1 Competitive markets - questions
5. 1.1 Competitive markets - simulations and activities
6. 1.2 Elasticities
7. 1.2 Elasticities - notes
8. Section 1.2 Elasticities - questions
9. Section 1.2 Elasticities - simulations and activities
10. 1.3 Government intervention
11. 1.3 Government Intervention - notes
12. 1.3 Government intervention - questions
13. 1.3 Government intervention - simulations and activities
14. 1.4 Market failure
15. 1.4 Market failure - notes
    1. The meaning of externalities
    2. Types of externalities
    3. How do externalities affect allocative efficiency?
    4. Negative externalities of production
    5. Negative externalities of consumption
    6. The economic theory of traffic congestion
    7. Demerit goods
    8. Government responses - demerit goods
    9. Possible government responses to externalities
    10. Direct government provision
    11. Extension of property rights
    12. Taxes and subsidies
    13. Tradeable pollution rights
    14. Regulation, legislation and direct controls
    15. Positive externalities of production
    16. Positive externalities of consumption
    17. Merit goods
    18. Why might merit goods be underprovided by the market?
    19. Government responses - merit goods
    20. Public goods
    21. Common access resources & sustainability
    22. The tragedy of the Commons
    23. Common access resources in practice
    24. Sustainability
    25. Threats to Sustainability
    26. The threat to sustainability from the use of fossil fuels
    27. The threat to sustainability from poverty
    28. Government responses to threats to sustainability
    29. Cap and Trade Schemes
    30. Promoting Clean Technologies
    31. The 'dirty side' of cleaner technologies
    32. International responses to threats to sustainability
    33. Asymmetric information
    34. Abuse of monopoly power
    35. Inequality
16. Section 1.4 Market failure - questions
17. Section 1.4 Market failure - simulations and activities
18. 1.5 Theory of the firm
19. 1.5 Theory of the firm - notes (HL only)
20. Section 1.5 Theory of the firm - questions
21. Section 1.5 Theory of the firm - simulations and activities
22. Print View

Asymmetric information

For markets to function perfectly, all parties to an economic transaction should have perfect knowledge about the terms of the contract, the products and services that form the subject of the agreement and the prices in the market. In practice, the real commercial world rarely confirms to this ideal, and it is common for one of the parties to have better and/or more knowledge than the other, leading to imperfect competition and market failure. This situation is called asymmetric or imperfect information.

Properly functioning markets provide a valuable service to society, because consumers are able to purchase the goods and services that best match their preferences. However, asymmetric information can be used as a source of power in determining the outcome of the transaction. As a consequence, the market will not achieve allocative efficiency, because one of the parties - in this case normally the consumer, pays a higher price for a product than they would have done if they had perfect knowledge. In a perfect market, consumer and producer surplus should both be maximised at the market price, i.e. the conditions are in place for a Pareto optimum allocation of resources.

A common example of where the buyer pays more for a good than is socially efficient is where the seller knows much more about the characteristics of that good than the buyer. For example where:

• the seller of a product knows it is faulty
• commercial ideas with technical aspects are hard to describe contractually, but privately known by innovators
• labelling of food products use alternative terms for ingredients consumers would normally avoid, e.g. various names for sugars such as glucose, sucrose and fructose
• firms may have no incentive to provide consumers with information in markets with a public good aspect

It is also possible that the consumer has more information than the seller. For example, purchasers with specialist knowledge of antiques may be able to buy a antique for a price less than its true market value from a private seller, who does not have this expert knowledge.

The government has a number of policy tools at its disposal to correct asymmetric information and to control externalities. These include taxes, education programmes and production regulation intended to increase the flow of information to consumers. Government may decide to intervene in the market to require producers to disclose critical information, such as mandatory product labelling. The objective of this government intervention may not be to alter consumption behaviour in particular, but to increase informed consumption. However, these measures can be expensive and ineffective and perceived as government interference in the free market.

The growth of computer ownership with access to the internet has reduced the opportunities for asymmetric information, as consumers are able to access greater details on products, prices and customer reviews.