Unit 1 Micro: Asymmetric Information

For markets to work, there needs to be symmetric information i.e. consumers and producers have the same level of knowledge about the products, and they know everything there is to know about them. Asymmetric information occurs when somebody knows more than somebody else in the market. This can make it difficult for the two people to do business together. This is an example of information failure in a market

Examples include the following:

Warranties: The miss-selling of extended warranties by high street retailers on domestic electrical goods such as televisions and dishwashers

Sub-prime mortgages: A lender does not know how likely a borrower is to repay their loan.

Insurance: A car insurance company cannot tell the risks associated with each single driver

Market for used cars: A used-car seller knows more about the quality of the car being sold than do buyers. The mini case study below on the Market for Lemons covers this example!