Asymmetric Information. Agents have asymmetric information when some agents have more information than others.
Asymmetric information can cause market failure.
Examples of asymmetric information leading to market failure include:
- Banks/Credit Markets. Asymmetric information may exist in credit markets as borrowers are likely to know more about their own credit worthiness than a bank does. Consequently, low-risk borrowers will be limited to small loans with high rates of interest if banks cannot tell whether they are risky or not.
- Mechanics. A mechanic is likely to know more about cars than a customer at a garage. A mechanic could lie and claim a car needs more work done to it than is necessary.