Economic Idea- Information Asymmetry

By Kibash
Information asymmetry as defined by Investopedia is sometimes referred to as information failure, is present whenever one party to an economic transaction possesses greater material knowledge than the other party.
It also occurs when one party of an economic transaction(buyer or seller) has more information than the other. It occurs anywhere two separate parties are involved (like buyers and sellers).
For instance, a man who wish to sell fairly-used car, only him understands and know better about the current state of such car. Such individual is expected to advertise with qualities that will be in his favour in order to attract buyers. In the process of doing this, some information are withheld. This is known as information asymmetry. It could be from the side of the seller or the buyer.
This is what mostly occur in Nigeria politics today, politicians do not divulge their true reasons for contesting, propaganda is what they give.
Information Asymmetry result to some economic problems. These problems are situations where individual economic decisions are hypothetically worse than they would have been had all parties possessed more symmetrical information. They include:
Adverse Selection
This is a process by which prices and quantity of goods or services in a given market are altered due to one party having information that the other party cannot obtain at reasonable cost. Undesired results are obtained due to the fact that buyers and sellers have access to different information.
For example, a life insurance company charges higher premiums for race car drivers. A car insurance company charges more for customers living in high crime areas. A health insurance company charges higher premiums for customers who smoke. In contrast, customers who do not engage in risky behaviors are less likely to pay for insurance due to increasing policy costs (Investopedia).
Moral Hazards
This is a situation in which a party will take risks because the cost that that could incur will not be felt by the party taking the risk. There is tendency to take undue risks because the cost are not borne by the party taking the risks.
In relation to asymmetric information, moral hazard may occur if one party is insulated from risk and has more information about its actions and intentions than the party paying for the negative consequences of the risk. For example, moral hazards occur in employment relationships involving employees and management. When a firm cannot observe all of the actions of employees and managers there is the chance that careless and selfish decision making will occur.
Market Failure
This is a situation in which market becomes inefficient in its operations. Lack of equal information causes economic imbalances that result in adverse selection and moral hazards. All of these economic weaknesses have the potential to lead to market failure.