Edexcel AS/A Level Economics revision

Information asymmetry Information asymmetry is a situation in which there is imperfect knowledge, usually when one party has more information than the other.  Adverse selection When information asymmetries distort the market  before a transaction takes place.  e.g. In the used car market, the seller of the car has more information than the buyer, and the buyer knows this. Therefore, the buyer is less likely to trust the seller and will offer less to the buyer. The buyer may think the car is worth £3000, whereas the seller may know it is actually worth £2000.  This can lead to adverse selection, which is a distortion of the usual market process. If a seller had a car that was worth more than £3000, they would not put it up for sale, as they would know that no-one would buy it as no-one would trust them enough - the highest quality cars exit the market. This means the average quality of cars on the market would be lowered, so buyers would lose even more trust in the ma

Externalities  An externality is a cost/benefit of a transaction that accrues to a third party, and therefore is not accounted for by the price mechanism, as it operates between the consumer and producer, no anyone else.  An externality involves a difference between private costs and benefits and social costs and benefits.  Private cost - cost incurred by an individual as part of its production or other economic activities. Cost of labour, capital etc the firm incurs.  Private benefit - the benefit incurred by an individual/firm directly involved in the transaction either as a buyer or seller.   Social cost - MPC + external cost Social benefit - MPB + external benefit  External cost - cost associated with an individual's production or other economic activities which is borne by a third party and so is not reflected in market prices.  External benefit - " "  Marginal - the cost of producing the next unit of a good.  Four types:  Negative Production external