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Missing Market due to Asymmetric Information
A missing market occurs when a potentially beneficial exchange fails to happen because of asymmetric or non-verifiable information. [1] Adverse selection is a key cause of such missing markets; for instance, in a 'lemons' market where buyers cannot assess quality, the information gap can cause the market to collapse entirely as no cars are offered for sale. [1]
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Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
The Economy 2.0 Microeconomics @ CORE Econ
Introduction to Microeconomics Course
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Missing Market due to Asymmetric Information
The Online Artisanal Goods Market
A market for custom-made software has two types of developers: 'Expert' developers who produce high-quality code valued at $10,000, and 'Novice' developers who produce low-quality code valued at $2,000. Clients cannot distinguish between developer types before hiring them and believe there is an equal number of each. Given this situation, what is the critical reason the market for Expert-developed software is likely to fail?
An individual starts with $100 and can either spend it now or store it for later. Their choice is represented on a graph where the horizontal axis is 'Consumption Now ()'. They choose the point (60, 40). Match each graphical feature to its correct economic interpretation.
A market for freelance logo design consists of both high-skill and low-skill designers. Clients cannot tell the difference in skill level before a project is completed. Arrange the following events in the logical sequence that describes how this information problem can lead to the disappearance of high-skill designers from the market.
Explaining the Market Collapse Mechanism
The Unraveling of the Used Smartphone Market
In a market with a mix of high-quality and low-quality goods where buyers cannot assess quality beforehand, the market for high-quality goods fails primarily because buyers are simply unwilling to pay a premium price for better products.
In a market where sellers know the quality of their product but buyers do not, a 'market unraveling' process can occur. Match each component of this process to its correct description.
Consider a market for used laptops where there are two types of sellers. 'High-Quality' sellers have laptops that are worth $800 to a buyer. 'Low-Quality' sellers have laptops that are worth $200 to a buyer. Buyers cannot distinguish between the two types before purchase and believe there is a 50% chance of getting either type. Based on this information, what is the highest price a risk-neutral buyer would offer, and what is the ultimate consequence for the market?
The Health Insurance 'Death Spiral'
A market for freelance logo design consists of both high-skill and low-skill designers. Clients cannot tell the difference in skill level before a project is completed. Arrange the following events in the logical sequence that describes how this information problem can lead to the disappearance of high-skill designers from the market.
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Government Provision of Unemployment Insurance as a Response to Missing Markets
Uninsurable Risk of Poor Academic Performance
The Market for High-Skill Artisans
A company wants to hire freelance graphic designers for a critical, high-stakes project. The company cannot accurately assess a designer's true skill level before hiring them, only after the work is complete. They offer a fixed, generous hourly rate to all applicants. Despite many designers applying, the company finds that the quality of work from those they hire is consistently below their expectations, and they ultimately cancel the freelance program. Which of the following best explains this market failure?
The Market for Academic Insurance
True or False: A private market for insurance against receiving a poor grade in a college course fails to exist primarily because the potential financial losses for students are not significant enough to warrant creating such a product.
The 'Lemons' Problem and Market Collapse
An insurance company wants to sell individual health insurance policies. The company cannot verify an applicant's complete health history or future health risks, but each applicant knows their own health situation well. Match each economic phenomenon to its description in the context of this market.
A market for a specific type of product is failing. Arrange the following events in the logical sequence that explains how an information imbalance, where sellers know the product's true quality but buyers do not, can lead to the complete disappearance of this market.
When buyers in a market cannot distinguish between high-quality and low-quality products, while sellers are aware of the true quality, the price buyers are willing to pay may fall so low that sellers of high-quality goods exit the market. In the most extreme case, this information imbalance can cause the entire market to fail to exist, a situation known as a(n) ________ ________.
A commercial bank is considering offering loans to new tech startups. The bank cannot reliably distinguish between startups with a high probability of success and those with a high probability of failure. The startups, however, have a much clearer understanding of their own potential. If the bank sets a single interest rate for all startup loans that reflects the average risk of the entire applicant pool, what is the most likely long-term outcome for this specific loan market?
Overcoming Information Gaps in Specialized Markets
Government Provision of Unemployment Insurance due to Missing Private Markets