Q8. True or False: A market may coll... [FREE SOLUTION]

Chapter 4: Q8. (page 94)

True or False: A market may collapse and have relatively few transactions between buyers and sellers if buyers have more information than sellers.

Short Answer

Expert verified

The statement 鈥淎 market may collapse and have relatively few transactions between buyers and sellers if buyers have more information than sellers鈥� is false.

Step by step solution

Step 1. Effect of asymmetric information

Asymmetric information is a problem of insufficient information to make an informed decision in a market. Here, one party suffers due to a lack of information that the other party (seller) possesses.

For example, a second-hand car buyer does not have the information that the owner/seller of the second-hand cars possesses. A buyer may end up buying a lemon/bad used car.

The said lack of information increases the risk of choosing a 鈥渂ad鈥� good or service. Due to this, the buyer鈥檚 demand falls short of what would have been in case there was no asymmetry or more information. Hence, the scarce resources are inefficiently allocated.

Step 2. Effect on the market if buyers have more information than sellers

If buyers have more information than sellers, they will be able to make better-informed decisions. There will be lower or no risk associated with purchasing a good or service; hence, the demand will be higher. The sellers will sell the goods to the buyers who value their goods the most, and producers will do production at the lowest cost possible.

Thus, there will be both allocative and productive efficiency, with no wastage of resources. The transactions will be relatively higher, and the total surplus will be maximum. The market will not collapse.