IBDP Economics 2.9 Market failure—public goods HL Paper 1 - New Syllabus
Question
Explain two ways a government might respond to the existence of asymmetric information in a market
▶️Answer/Explanation
Answers may include:
- Definition: asymmetric information.
- Explanation: of adverse selection, moral hazard, and government responses such as regulation, legislation or the provision of information.
- Diagram: not needed for this question
Question
Using real-world examples, evaluate the policies a government might adopt to respond to a market situation in which significant asymmetric information exists.
▶️Answer/Explanation
Answers may include:
- Terminology: Asymmetric information, adverse selection, moral hazard.
- Diagram: Not needed for this question.
- Theory: Candidates should consider government responses to markets in which asymmetric information is considered problematic such as legislation and regulation, the provision of information. Candidates might also consider private responses such as signalling and screening where a government decides not to intervene.
- Synthesis (evaluate): An evaluation of the different policies available to the government when there is asymmetric information in the context of the examples offered by the candidate. Candidates might conclude that the best course of government action is to do nothing and allow private responses to the asymmetric information. Or, alternatively, that government action in certain situations may be imperative.
- Example(s): A relevant real-world example(s) in which asymmetric information exists.