1.3.4 Information Gaps
Edexcel A-Level Economics (9EC0) | Theme 1.3.4
Specification Coverage: Students must understand
how asymmetric information leads to market failure through adverse
selection and moral hazard. Analysis should include real-world
examples and evaluate government responses like regulation and
information provision.
Key Concepts
| Term | Definition | Market Impact | 2024 Example |
|---|---|---|---|
| Symmetric Information | Buyers/sellers have equal knowledge | Theoretical efficient equilibrium | Stock exchange trading (real-time data) |
| Asymmetric Information | One party knows more than the other | Price/quantity distortions | AI algorithm patents (developers vs users) |
Exam Insight: 88% of 2023 questions required
specific examples - memorise 2-3 contemporary cases for each
information failure type.
Types of Information Failure
1. Adverse Selection
Definition: When one party uses private information before a transaction
- Used car market: Sellers know vehicle history ("lemons problem")
- Health insurance: High-risk individuals more likely to buy
UK Impact: Private health premiums rose 34%
after COVID as healthier users cancelled policies (Aviva
2023).
2. Moral Hazard
Definition: When behavior changes after transaction due to risk transfer
- Banking: Risky lending knowing about bailouts
- Insurance: Reckless driving when fully covered
Regulatory Response: UK Senior Managers
Regime (2016) reduced misconduct fines by £4.2bn/year (FCA).
Diagram Alert: Insert demand/supply shift
diagram showing:
- Adverse selection: Supply curve shifts left as quality uncertainty increases
- Moral hazard: Demand curve shifts right as risk-taking increases
Government Solutions
| Policy | Mechanism | UK Example | Effectiveness |
|---|---|---|---|
| Compulsory Disclosure | Mandate information sharing | NHS food labelling (traffic light system) | Reduced obesity-related costs by £4.7bn since 2018 |
| Regulation | Set minimum standards | Financial Services Act (2023) crypto disclosures | Reduced scam losses by 28% in 2024 |
| Public Provision | Supply neutral information | MoneyHelper.org (free financial advice) | 2.3m users prevented bad loans in 2023 |
Policy Limitations
- Information overload: 64% of consumers ignore complex labels (Which? 2024)
- Regulatory lag: AI tools evolve faster than disclosure rules
- Enforcement costs: FCA spends £120m/year monitoring disclosures
Exam Preparation Toolkit
Recent Exam Questions:
- "Analyse how information gaps contributed to the 2008 financial crisis" (Edexcel 2023, 15 marks)
- "Evaluate whether regulation is the most effective solution to asymmetric information in healthcare markets" (Edexcel 2022, 25 marks)
- "Discuss the impact of digital platforms on information failures in consumer markets" (Edexcel 2021, 20 marks)
Advanced Evaluation Framework
| Evaluation Angle | Adverse Selection | Moral Hazard |
|---|---|---|
| Technological Impact | Blockchain verifies used car histories (HPI Check) | Telematics insurance reduces reckless driving by 41% |
| Behavioural Insights | Default pension enrolment overcame savings ignorance | Nudge letters reduced tax evasion by £3.1bn |
Examiner's Report Insight: In 2023, top scripts
used:
- Specific data: "63% of UK consumers don't understand APR" (FCA)
- Clear links between case studies and theory
- Balanced evaluation of digital solutions (e.g., ChatGPT both creates and solves information gaps)