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1、Discussthereasonswhyasymmetricinformationcanbeasourceofmarketfailure.Useexamplestoillustrateyouranswers.ByAndrewSweetingNovember1998IntroductionThisessayisconcernedwiththeissueofinformationinmicroeconomics,particularlywhereinformationisafactorinthefai
2、lureofindividualmarketsinaneconomy.Economicinformationanditsimportanceinmicroeconomicsisinitiallydiscussed,andcontinueswithdefiningasymmetricinformation,whichisafactorthatcanleadtoamarketfailure.Intheanalysisofasymmetricinformationinmarkets,exanteande
3、xpostasymmetriesinformationarediscussedinrelationtomarkettransactions.ExanteasymmetricinformationcanbeexplainedthroughAdverseSelectioninrelationtoqualityofgoodsintheproductmarket,andexpostasymmetricinformationcanbeexplainedthroughMoralHazardininsuranc
4、emarkets.Strategiestocorrectmarketfailure(s)causedbytheseinformationasymmetriesisaddressedforeachexamplediscussed.Theexpositionofthesetwotypesofasymmetricinformationproblemsleadstothediscussionofprincipal-agentproblems,particularlyinrelationtoefficien
5、cywagetheory,whichhavebeendevelopedtoanalysemarketfailures.Labourmarketfailureexplainedthroughtheefficiencywagetheoryhasbeenusedtoexplaininvoluntaryunemployment.EconomicsofInformation"Economicsisconcernedwiththeefficientuseoflimitedproductiveresources
6、forthepurposeofattainingthemaximumsatisfactionofourmaterialwants"(JacksonandMcConnell,1985,p.3),whichinvolveseconomicagentsundertakingtransactionsthatutilizetheseresourcestomeetandsatisfytheirwants.Bywayofanalysingthesemarkettransactions,economisthave
7、developedmicroeconomicmodels,suchasperfectcompetition,toexplaintheinteractionsinindividualmarkets.Muchofthisanalysishasbeenundertakenonthecriticalassumptionofeconomicagentshavingfullinformationaboutthegoodsorservicesbeingboughtorsold,andfullinformatio
8、nabouteachother.Theseassumptionsdescribeamarketwherethereisperfectinformation(Stiglitz,1993).Stigler(1961)statesthat"informationisavaluableresource:knowledgeispower"(p.213),andinformationcandetermineactionssuchaswherepurchasersbuyhigherquality
