Question

How does asymmetric information, or differences in the information known to parties in a transaction, lead to market failure?

What are examples of solutions to asymmetric information or ways to mitigate the problem?

Answer 1

The asymmetric information refers to incomplete information in any transactions where one party better superior information than others party.The problem of asymmetric inflammation found in Labour, Commodity, Financial markets.

The below the examples showing market failures due to asymmetric information.

• In labor market, employees know about his productivity than the employers so by paying high wages to the low productivity employees results in market failure due to incomplete information.
• In the financial transaction, fincncial advisers know more about the return of particular financial product than the investors this incomplete information leads to investors end up with investment in the high risky product.

The following measures to shows solutions for asymmetric information.

• Advertisement, or providing complete information in the financial transaction, providing research report and etc to the consumers.
• In the case of labor market obtaining complete information like educational background, employment background such relevant information is necessary for the employers to reduce incomplete information to reduce incomplete information.