Information Failure

Understanding Information Failure

  • Information failure is a type of market failure where individuals or firms lack necessary information to make informed decisions.
  • This often leads to inefficiencies in allocation of resources in the economy.
  • Information failure can occur in several forms such as asymmetric information, information gaps and information overload.

Types of Information Failure

  • Asymmetric information: This occurs when one party in a transaction has more or better information than the other. This can lead to adverse selection and moral hazard problems.
  • Information gaps: These occur when consumers or producers do not have access to critical information that could influence their decisions.
  • Information overload: This occurs when there is so much information that it becomes difficult for individuals or firms to process and make decisions.

Consequences of Information Failure

  • Misallocation of resources: Without full information, consumers and producers can’t make best choices, leading to inefficient outcomes.
  • Reduced economic welfare: Consumers may end up with products or services that do not maximise their utility while producers could under or over-produce.
  • Market failures: The existence of significant information failures can lead to market failures such as moral hazard, adverse selection, and principal-agent problem.
  • Inequity: Information failure could lead to inequitable distribution of resources, especially when those with more or better information exploit those without.

Ways to Address Information Failure

  • Government intervention: This could be through legislation to ensure full disclosure, provision of public goods information, or compulsory labelling of products.
  • Education and training: Improving knowledge and understanding of certain products, services or market conditions can alleviate information failure.
  • Use of technology: Digitisation and the internet have made it easier to access and share information, reducing information gaps.
  • Market signals: Prices, profits and competition can provide signals to consumers and producers to guide their decision-making and reduce information failures.