Question

Define and explain asymmetric information and outline its two sources. (20 marks, approximately 250 words please)

Answer 1

Asymmetric information means information failure .Asymmetric information occur when one party possesses greater material knowledge in comparsion of other party while doing an economic transactions.

We say that it is like seller have greater knowledge then the buyer..it is specialized knowledge and division of knowledge which he applied on economic trade.It is benefited sometimes like if a worker get specialized in his work then he will do more productive work.

It is called information failure when in an insurance transaction insured hide some facts about his health  before signing insurance agrrement then it is information faliure which create adverse selection and due to this premium will be raised for all customer.

sources of asymmetric information-

1) adverse selection refer to a process in which undesired result occur when buyer and seller have different information.

2) moral hazard - is a situation where a party take risk because the cost that could incur will not be felt by taking risk by the party.