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Missing Market (Definition)
A missing market is a situation where no formal market exists for a potentially beneficial exchange or trade. This failure to form a market is often caused by obstacles such as asymmetric or non-verifiable information.
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Economics
Economy
Introduction to Microeconomics Course
CORE Econ
Social Science
Empirical Science
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Information Asymmetry within a Firm's Hierarchy
Asymmetric Information in Principal-Agent Problems
The Problem of Incomplete Contracts
George Akerlof
Inadequate Property Rights as a Cause of Externalities
Informational Barriers to Government Intervention on Externalities
Adverse Selection vs. Moral Hazard
Hidden Attributes
Hidden Actions
Signalling (Economics)
Screening (Economics)
Signalling (Economics)
Screening (Economics)
Imperfect Information and Price Dispersion Online
Pareto Inefficiency from Asymmetric Information
Missing Market (Definition)
Verifiable Information (Definition)
Health Insurance Market Scenario
Match each scenario with the specific type of information problem it best illustrates.
Analyzing Interest Rate Policy and Inequality
A software company hires a freelance developer on a fixed-fee contract for a six-month project. After the contract is signed, the company cannot perfectly monitor the developer's daily effort. The developer, knowing their work is not closely observed, puts in less effort than promised, leading to a lower-quality final product. Which economic problem does this situation best illustrate?
Comparing Market Problems from Information Imbalances
Analyzing Information Imbalance in a Service Market
Explaining Equilibrium with Mixed Motivations
The problem of moral hazard arises primarily because one party in a transaction has private, pre-contractual information about the hidden characteristics of a good or service, which the other party cannot observe.
A skilled artisan produces handcrafted wooden chairs of exceptional durability, a quality that is not apparent from a visual inspection. Potential buyers are hesitant to pay the high price the artisan asks because they cannot distinguish these chairs from visually similar, but less durable, mass-produced alternatives. Which of the following strategies would be most effective for the artisan to overcome this information imbalance and justify the premium price?
Evaluating the Severity of Market Failure from Information Imbalances
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Missing Markets as an Explanation for Unaccounted Social Costs
The Market for Used Laptops
Consider a situation where an individual wants to borrow money from a peer, promising to use the funds responsibly and repay the loan promptly. The peer would be willing to lend if they could be certain of the borrower's future responsible behavior, but they ultimately refuse the loan. Which of the following best explains why a formal market for 'loans based on promises of future good behavior' fails to emerge in this scenario?
The Market for Residential Quiet
The Market for Employee Effort
A pharmaceutical company develops a new drug but decides not to sell it because the estimated production costs are higher than the price any consumer would be willing to pay. This situation is a classic example of a missing market.
Analysis of an Uninsurable Risk Market
For each scenario described, match it with the primary obstacle that prevents a formal market from emerging for the good or service in question.
The Case of 'Fired for Cause' Insurance
A student is willing to pay a significant premium for a tutoring service that guarantees they will receive an 'A' in their course. A tutor would be willing to offer this guarantee if they could be certain the student would exert the necessary effort outside of their sessions. Despite the potential for a mutually beneficial exchange, a formal market for 'guaranteed grades' does not exist. Which statement best analyzes the fundamental economic reason why this market is 'missing'?
A talented but unknown artist would be willing to pay a gallery a large sum of money if the gallery would guarantee to make them famous. The gallery would be willing to accept this payment if they could be absolutely certain of the artist's future commercial success and appeal. Despite this potential for a mutually beneficial agreement, a formal market for 'guaranteed artistic fame' does not exist. Which of the following statements best analyzes the fundamental reason for this market failure?