Information failure occurs when people make potentially wrong choices due to having inaccurate, incomplete, uncertain, or misunderstood information. The key issue is whether the information failure is trivial or has serious social effects. If information failures become serious, there may be a case for government intervention in the market. Examples of information failures include overestimating private benefits, underestimating private costs, myopia, difficulties handling complex information, misleading information, and insufficient information.

1. AS Micro: Information Failure and Market Failure
1. Information failure occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially ‘wrong’ choices.
2. The key issue is whether the information failure is trivial or has serious social effects
3. There may well be a case for the government to intervene in the market in some way if
information failures become serious.
Understand some examples of information failure in markets
Over-estimating private benefits of a product
Under-estimating private costs of a product
Myopia when making decisions
Difficulties in handling complex information
Misleading information
Insufficient information
Addiction

2. Key Concept: Asymmetric Information
Asymmetric information happens
when somebody knows more than
somebody else in the market. This can
make it difficult for the two people to
do business together. In extreme
cases, asymmetric information might
prevent market transactions taking
place at all.
Examples of asymmetric information
Who knows more in the market - the Buyer or the Seller?
Examples
1. Dentists and their patients
2. People selling their house
through an estate agent
3. People looking to buy life /
health insurance policies
4. Economics teachers applying
for a job at another school
5. A young couple applying for
a mortgage on their first
home
6. The used car market (market
for second hand vehicles)
7. A divorced man enters the
online dating market looking
for a new relationship
8. Doctors are paid by
pharmaceutical companies
to make speeches on the
effects of certain drugs
Who Knows More – the
buyer or the seller?
Comment / Problem Arising
from asymmetric information

3. Analysis of Information Failures as a cause of Market Failures
With questions on information failure it is important to have good analysis diagrams to hand to use
when discussing specific examples – here are two worth using:
Consumers who over-estimate the private benefits of a consuming a product:
Consumers who under-estimate the private costs of consuming a product:

4. Identifying and evaluating ways of overcoming information failures in markets
Approaches to information gaps
Real world example
Evaluation comment
Awareness campaigns
Compulsory labelling
Warranties / guarantees
Compulsory screenings
Service records
Accreditation schemes
Internet Price Comparison
Web Consumer Reviews
Behavioural nudges
Excess payments for claims
Blog articles on information failure (loads of good examples here):
http://www.tutor2u.net/blog/index.php/economics/C184
Adverse selection
Where the expected value of a transaction is known more accurately by the buyer or the
seller due to an asymmetry of information; e.g. health insurance
Asymmetric information
When somebody knows more than somebody else in the market. Such asymmetric
information can make it difficult for the two people to do business together
Information failure
Information failure occurs when people have inaccurate, incomplete, uncertain or
misunderstood data and so make potentially ‘wrong’ choices
Moral hazard
When people take actions that increase social costs because they are insured against private
loss: sometimes it is called hidden action due to the agent’s actions being hidden from the
principal
Persuasive advertising
Designed to manipulate consumer preferences and cause a change in demand
Signalling
Prices have a signalling function because the price in a market sends important information
to producers and consumers

5. Examples of information failures / information gaps in markets