Question

Give a couple of examples for cases with 'asymmetric information'.

What happens in such markets? write 300 words

Answer 1

ASYMMETRIC INFORMATION: It means when one party in an economic transaction have more information than the other party.IN other words the informatin is imbalance between the two negotiating parties in the knowledge of the transacting quality products.it means that imbalance one party have more information can enjoy the competitive advantage over the other party. ONE OF THE FAMOUS EXAMPLE IS : LEMON MARKET i.e market for second hand cars. There are two types of cars 1.high quality -PLUM 2.low quality-LEMON MIXED MARKET: A market where both types of cars are selling on the same price. Therefore where both types of cars are available in the market and how much the consumer is willingness to pay. it arises three questions:1.HOW MUCH A CONSUMER IS WILLING TO PAY FOR A LEMON? 2.HOW MUCH THE CONSUMER IS WILLING TO PAY FOR THE PLUM? 3. WHAT IS THE CHANCE THAT THE USED CARS AVAILABLE IN THE MARKET IS LEMON? FOR E.G : a stockbrokers knowledge is more valuable to a non-investment professional, such as farmer ,who may be interested in confidently trading stocks , to prepare for retirement. ANOTHER E.G : HEALTH INSURANCE IN IT : buyers who take the insurance have more information than the insurarer who give.buyers do not give the correct explanation or complete information so that they have in their minds that they get claim for it . firstly they have to pay a certain sum of money i.e insurance premium for getting claim.To fight adverse selection , insurance companies reduce exposure to large claims by limiting coverage or raising premiums.