discuss the reasons why asymmetric information.DOCVIP

Discuss the reasons why asymmetric information can be a source of market failure. Use examples to illustrate your answers. By Andrew Sweeting November 1998 Introduction This essay is concerned with the issue of information in microeconomics, particularly where information is a factor in the failure of individual markets in an economy. Economic information and its importance in microeconomics is initially discussed, and continues with defining asymmetric information, which is a factor that can lead to a market failure. In the analysis of asymmetric information in markets, ex ante and ex post asymmetries information are discussed in relation to market transactions. Ex ante asymmetric information can be explained through Adverse Selection in relation to quality of goods in the product market, and ex post asymmetric information can be explained through Moral Hazard in insurance markets. Strategies to correct market failure(s) caused by these information asymmetries is addressed for each example discussed. The exposition of these two types of asymmetric information problems leads to the discussion of principal-agent problems, particularly in relation to efficiency wage theory, which have been developed to analyse market failures. Labour market failure explained through the efficiency wage theory has been used to explain involuntary unemployment. Economics of Information Economics is concerned with the efficient use of limited productive resources for the purpose of attaining the maximum satisfaction of our material wants(Jackson and McConnell,1985,p.3), which involves economic agents undertaking transactions that utilize these resources to meet and satisfy their wants. By way of analysing these market transactions, economist have developed microeconomic models, such as perfect competition, to explain the interactions in individual markets. Much of this analysis has been undertaken on the critical assumption of economic agents having full information about the goods or