Micro and lead to them making decisions that cause

Micro Essay One – Market Failure Imperfect information is a common type of market failure. In the first instance, it occurs when consumers and producers do not have perfect knowledge. The second type is asymmetric information which is where incorrect choices are made because of the gap in knowledge between the buyer and seller It is a type of imperfect information that can lead to the misallocation of resources. The assumption in competitive markets is that the producers and consumers in the economy each have access to perfect information. However, the reality is far different. The lack of knowledge that producers and consumers have about products and services in regards to their price and benefits leads to market failure. “Market failure occurs when the market allocation of a good is Pareto inefficient”. (Core-econ) The inaccurate data that people have then leads them to make decisions that may not be fully beneficial for them. In both types of information failures, there will be a misallocation of scarce resources, consumers paying the wrong amounts and companies producing the wrong amount of product. When there is an information gap, then there is a market failure. Since a perfect market would have perfect information available for all consumers and producers. There are quite a few causes of imperfect information. They include information gaps about the long-term consequences or benefits of consuming a product or service. It can also be caused the knowledge being intricate and niche which means the average person cannot understand it fully. There can also be cases where there is unbalanced knowledge between the buyer and seller, where one possesses more knowledge than the other and seeks to take advantage of this. The information regarding price can also cause imperfect information since consumers may not know how to accurately find the best price for a product and may, therefore, end up paying much more than the average retail price. There can be instances where the information provided is too complex for the consumer to properly understand and therefore making rational and informed purchasing decision. Imperfect information can have a drastic effect on people’s behavior and lead to them making decisions that cause significant welfare losses. When there is asymmetric information available for consumers they “may under-estimate the net private and external benefit of merit goods”, and they “may overestimate the net private and external cost of demerit goods.”. (Economicsonline) It can also have an effect on firms and companies since they may purchase too much or too little stock because of gaps in their information. This leads to market failure since there would be a surplus. The welfare losses that can arise from this type of market failure can be severe and long-term. One example of imperfect information leading to a welfare loss is the use of tanning salons and antibiotics. There is asymmetric information involved in both of these cases. Often the consumer of these products is not aware of the severe long-term consequences that can arise from consuming these products. Using antibiotics can lead to bacterial resistance which makes future infections more difficult to treat. Tanning salons can lead to skin problems and even cancer. There is an information gap with both of these products since many consumers are unaware of the long-term risks involved. The welfare costs can be severe in both of these cases and the market failure arises from the lack of information these consumers have when making the decisions to use these products. An example of asymmetric information causes a welfare loss is the selling of mortgages and other types of loans. The provider of the mortgage and the loan will have to work with assumptions that will not totally predict the likelihood that the borrower will indeed keep up with repayments. A borrower has a superior knowledge of their overall ability to pay back the loan. This asymmetric information can lead to inadequate checks being made and therefore bad decisions made as a direct result of information failure. The welfare loss occurs when a bad decision is made to give someone a loan and then they are unable to pay. If the full information had been available, then they would not have been given the loan. Remedying the market failure that arises due to information failure is usually done through government intervention. They can address the information gaps in a number of ways. The first way is to increase the supply of information. The government can put pressure on suppliers to provide full information on the packaging of products. An example is the packaging on cigarette packets which have clear information that lets a consumer know that smoking causes lung cancer. This provides them with the full information and they can, therefore, make a much more informed purchasing decision which reduces the market failure arising from incomplete information. The government can also run public campaigns to inform consumers about net benefits or negatives about certain products. This can include flyers and TV advertisements. This can give consumers the full information about the full long-term negative externalities that a certain product provides. The government also has the power to directly influence the advertising agency. They can force advertising to be less persuasive and more focused on information. They can also make companies adhere to a strict standard of transparency. One of the main steps that a government can take to reduce information failure is by tackling the issues head-on by increasing the supply of information directly to consumers. The government can directly impose measures on companies to increase their transparency. Another form of government intervention that can help reduce information failure is by increasing the demand for more information. Consumers are more likely to actively seek out information if it is available at a low cost and easy to find. If consumers don’t have to pay for information, then they are much more likely to seek it out. However, in this era of constant information, it can become very overwhelming and they may not use it to the maximum benefit because of a potential overload.The creation of various pressure groups is another method of increasing demand. They work by campaigning for more transparent information to be available for the consumer. They can be very effective as they can add pressure on firms and companies to release more information regarding their products. The demand for information can be increased by having a focus on education. A population that is well educated in basic Maths, English and IT will be far more likely to seek out information. If a population does not possess the correct skills to find information then they are not likely to do. Increase the role of education means consumers are much more likely to make informed rational choices since they will actively choose to seek information about a product before purchasing. These skills will also allow them to have a greater appreciation of the knowledge at hand. The issue of complex information can be alleviated by making simpler packaging. For example, the UK government has implemented simple guidelines on food packaging so consumers can be clear about what they are eating. This is color coded so consumers can easily know which foods are healthier for them than others. This means they are more likely to make a healthier eating decision, although they may still choose the unhealthy option but will now have better information about the risks involved. If a person does choose a product that is unhealthy for them, being informed about it means they can be aware of the risks involved. The issue of imperfect information causes substantial inefficiencies which end up leading to market failure. When firms and consumers have uneven information or a lack of information together it leads to decisions that are not rational. Government intervention can help ease these welfare losses through the use of a sustained increase in the supply of information and also by increasing the demand for information. These measures can take significant amounts of time and effort before they start to see real differences, however. Over the long run, they can reduce the market inefficient arising as a result of asymmetric information and information failure in general. Once this information gap and information inequality between producers and consumers are more even, these inefficiencies are greatly reduced and therefore the market failure is directly addressed. References: http://www.economicsonline.co.uk/Market_failures/Information_failure.htmlhttps://www.core-econ.org/the-economy/book/text/0-3-contents.html