ECN 001A Lecture Notes - Lecture 14: Subprime Mortgage Crisis, Efficiency Wage, Used Cars
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ECN 001A Full Course Notes
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Document Summary
All figures and diagrams taken from microeconomics: theory and policy, bagher modjtahedi, published april 2008 . Asymmetric information - one party has better information or service than the other party involved in a transaction. Could exist in both output and input markets. Eg sellers of used cars know more about the cars than other buyers. Results in market failure in the sense that a different mi of goods would be sold at different prices if information was symmetric. Thus, asymmetric information results in allocative inefficiency. Results in two kind of problems in the market. The party to a transaction with an information disadvantage would select the wrong kind of people or products for the transaction, and this selection would result in adverse outcomes. The party to a transaction with information advantage takes an immoral action after the transaction, increasing the hazard to the party with the information disadvantage.
