Economics - Information Failure Notes

Topics: Market, Tuition, College tuition Pages: 2 (481 words) Published: January 1, 2013
Information Failure
Information Failure is a lack of information resulting in consumers and producers making decisions that do not maximise welfare. When there is information failure, there will be an insufficient allocation of resources and hence market failure. Imperfect information or information failure means that merit goods are under-produced while demerit goods are over-produced or over-consumed. Information failure is caused by:

* Misunderstanding the true costs or benefits of a product * Uncertainty about costs and benefits 
* Complex information 
* Inaccurate or misleading information
It is important to have good information because it enables us to take the rational decisions that are needed to maximise our own welfare and that of society.The decisions taken by consumers and also firms and even governments are based on ignorance due to inaccurate and incomplete information. This is the problem of information failure. Example: The new tuition fee system in England

Lack of awareness – when the new system of tuition fees were introduced for universities in the UK, many parents and students claimed to have found the fee system confusing and felt that they did not receive enough information about it. Many students say that they are not fully aware of the charges and that the universities provide very little information on the careers prospects and future earnings of their graduates after they have moved into the labour market. Asymmetric Information

In order for markets to work, there needs to be symmetric information which is where consumers and producers have the equal level of knowledge about the products and also that they know everything there is to know about them. Asymmetric information is information that not equally shared between two parties. This can make it difficult for the two people doing business together. Examples:

Health care - we do not have the same medical knowledge as the doctor. We rely on the doctor’s...
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