ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Financial markets exhibit asymmetric information in any transaction in which one of the two parties involved has more information than the other and thus has the ability to make a more informed decision. Economists say that asymmetric information leads to market failure.

Detailed explanation-2: -Solutions include the introduction of regulations, offering warranties or guarantees on items sold, insurance, and bottom-up efforts to inform consumers of products’ and sellers’ quality and reputation.

Detailed explanation-3: -There are two types of asymmetric information – adverse selection and moral hazard.

Detailed explanation-4: -Asymmetric information theory suggests that sellers may possess more information than buyers, skewing the price of goods sold. The theory argues that low-quality and high-quality products can command the same price, given a lack of information on the buyer’s side.