Question

How can asymmetric information problem be resolved in a competitive market?

Answer 1

Asymmetric information (also known as information failure) is a situation where one party of an economic transaction posessess greater material knowledge than other party and uses this for their advantage. In most of the cases, the seller or producer is having greater knowledge than buyer or consumer. However the reverse dynamic is also possible. And because of this asymmetric information, there exist market failure like adverse selection and the so-called lemons problem.

One of the method to address the problem of adverse selection is to provise warranties, guaranties and refunds by the producers. This will safeguard the consumers from consuming defective products. Another solution for asymmetric information is that consumers should make an effort to review the consumer reports, online product reviews like eBay and Amazon seller ratings, Uber driver reviews etc.

Also certain regulations must also be implemented by he government authorities to safeguard the consumers who are vulnerable to exploitation by sellers.