SRJC_H2_ECONS_9757_Q3_MS

3 Information failure refers to situations in which economic agents have imperfect information regarding the benefits or costs of their actions as well as when information between the transacting parties is asymmetric in nature. (a) Explain how information failure could lead to market failure. [10] (b) Discuss the view that government intervention to correct the above market failure is always desirable. [15] (a) Intro:  Define market failure/ imperfect info / asymmetric info  Direction statement: Both sources of information failure lead to market failure as they lead to allocative inefficiency through overconsumption OR underconsumption Market failure refers to a situation where decisions made based on market forces of demand & supply fail to achieve efficiency in resource allocation and thus there is welfare loss to society. Imperfect information means that consumers (or sellers) do not have full relevant knowledge about the product and so they are not able to make a good decision. Consumers may have inaccurate, incorrect or incomplete information about the product. They may also have less information than sellers, in which case this leads to asymmetric information and thus market failure. Both forms of information failure lead to situations where consumers either overconsume or underconsume a particular good or service. This leads to allocative inefficiency and thus market failure. TS1: Imperfect information leads to partial market failure as the consumers fail to recognise the true benefit/cost of consuming a good and therefore under/over consume it leading to allocative inefficiency. Consumers and producers make cost-benefit decisions based on the information that they have. When the costs and benefits that they perceive of consuming certain goods and services are not accurate, this can result in them making decisions that do not maximise their welfare. An example of this can be seen in the market for sugary drinks. Consumers of sugary-drinks make decisions on how many drinks to consume based on the costs and benefits that they perceive of consuming those drinks. An exampl e of the benefits to a consumer would be the enjoyment of the taste and the burst of energy they may get when drinking those drinks. A cost that the consumer may perceive would be the price that they need to pay in order to purchase the drink. However, many consumers may fail to consider the possible long-term damage that consuming sugary drinks may have on their health. An example of this would be that regular consumption of such high amounts of sugar can lead to obesity and other related ailments such as diabetes. This is likely to be because the enjoyment of the sugary drinks is immediate whereas the health problems it may cause are often slow to occur and often do not show any outward signs until the problem is quite advanced. Thus consumers often discount theses costs involved in consuming