Information Failure

Perfect Information

In Perfect information people know everything about there decisions before they make them, therefore they know which decisions are best for them and will maximize their welfare. This means that people are able to make totally rational decisions.

Perfect information is a theoretical extreme only possessed by ‘Economic man’ who is a hypothetical person created by Adam smith in order to model economic decisions.
Imperfect Information

This is a situation where people lack all of the information about the effects of their decisions and it can mean people make irrational decisions. When people make the wrong decisions by buying products at the wrong price/quantity ‘market failure’ occurs as resources have failed to be ‘allocated efficiently’. The government tries to reduce imperfect information as much as possible by legislating so that companies have to warn you about possible negatives of their products.

Asymmetric Information

Asymmetric information occurs when one party has more information than another in an economic transaction. For example a Car salesman may know more about a car than the buyer, so the buyer may buy the car for too much money. This can result in a ‘moral hazard’ which is where one party pay’s for someone else’s risky decisions. In this case the seller could have bought a faulty car (lemon) in the hope that they could sell it to consumers not knowing it was faulty for a profit.