BADM 534 UC Economics Asymmetric Information and Market Failure Essay – Description
Markets can fail to achieve their full potential for mutually beneficial exchanges if the the buyers and sellers have different information. The fundamental problems that can arise from asymmetric information were studied by George Akerlof, who illustrated the potential market failure in the market for used automobiles. Suppose the owner of a used auto lists the vehicle for sale at an online exchange. In this case, the seller has been driving the auto for some time and has more information about the quality of the car than a potential buyer, even if the buyer can test-drive the car or have it evaluated by a skilled mechanic. Due to this uncertainty about quality of the car, the buyer may reduce the amount they are willing to pay for the used vehicle. As the degree of uncertainty increases, the buyer’s offer will continue to decline. If the buyer’s offer drops below the minimum amount the seller is willing to accept, the exchange will not happen. As a result, the buyer and seller could make a mutually beneficial deal if there was no uncertainty about the auto, but the trade may not occur if the buyer has enough questions about the quality of the car. Thus, the market may fail to achieve mutual gains for the buyer and seller due to asymmetric information. Please provide a graduate-level response to each of the following questions:
Please describe another example where uncertainty about product quality may lead buyers to reduce their bid or even decline to make an offer for a product.
Have you ever declined to purchase a product due to uncertainty about quality? If so, what information would have helped you to make an offer?
In contrast, have you ever had trouble selling an item because the buyer was uncertain? Did you do anything to help resolve their information problems?
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