Question

In: Economics

is government intervention always required to deal with the problem of asymmetric information?

is government intervention always required to deal with the problem of asymmetric information?

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Expert Solution

The intervention of government is not always needed to deal with the problem of asymmetric information. The information asymmetries, also known as information failure, are created when one party to an economic transaction possesses greater material knowledge compared to the other party. It normally manifests when the seller of a product or service has more knowledge than the buyer, although the reverse can also be possible. Majority of the economic transactions involve information asymmetries. The problems of adverse selection, moral hazard, and the principal-agent may occur in the case of imperfect and incomplete information such as insurance market, old car market, and health market.

The problem of adverse selection can be solved by private production and sale of information, financial intermediaries, and regulation by government to increase the information and collateral net worth. The problem of moral hazard can be solved by production of monitoring information, financial intermediaries, and regulation by government to increase the information and debt contracts. The problem of principal-agent can be solved by net worth, financial intermediaries and monitoring and enforcement of restrictive covenants


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