A) Symmetric and asymmetric information

Asymmetric information occurs when the consumer and producer have different levels of information available to them.

For example, in an insurance market the consumer may know more about their own level of risk than the insurance company. The firm therefore has to make its decision using the information provided by the consumer.

The opposite can also occur. A seller may know more about the quality of a product than the person buying it. This could cause the consumer to make a decision which they would not have made if they had access to the same information.

Symmetric information occurs when consumers and producers have the same level of information available to them. This makes it easier for both sides to make informed decisions.

B) Information gaps and the misallocation of resources

A lack of information can cause consumers and producers to make decisions which do not allocate resources efficiently.

For example, consumers may not understand all of the costs associated with consuming a demerit good. This can contribute to overconsumption.

Consumers may also underestimate the benefits of merit goods, which can result in underconsumption.

Where these information gaps cause too much or too little of a good or service to be consumed or produced, the market may fail to allocate resources at the socially optimum level.

What the full guide adds

For this topic, the full AS guide also covers:

• A detailed insurance-market example, including how consumers may have more information about their level of risk than the insurance company.
• The car-market example, where sellers may know more about the quality and possible problems of a vehicle than the consumer.
• How greater transparency and online product reviews can reduce asymmetric information and improve consumer decision making.
• The link between information gaps and the overconsumption of demerit goods, using cigarette consumption as an example.
• The link between information gaps and the underconsumption of merit goods, including education and its longer-term benefits.
• Why information gaps can create a misallocation of resources and market failure, and why government intervention may be used to reduce them.