2.10 Asymmetric Information

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This refers to knowledge gaps that almost every market will have.
When there is equal information accessible to everyone, then it is called perfect/symmetric information
This asymmetric information can cause exploitation of consumers not informed of the potential side effects. In which case if they knew, the demand would decrease.
If there are unknown benefits like merit goods, if consumers knew then the demand would increase.

This is when either of the parties seller or buyer has more information and uses it to base their purchases.
People with undisclosed health conditions will buy a higher risk health insurance as they are more likely to cash out on it.
Problem is that for insurance companies the risk pool increases and premiums for low risk individuals will also increase.
This can be prevented by medical underwriting; where all medical issues must be disclosed before hand, and risk based pricing. This leads to market failure as it alters how price mechanism would normally take effect.

The lack of incentive to guard yourself because you know you are protected from the consequences of your actions.
A common example is banks taking high risk decisions knowing if they go bankrupt they will be bailed out by the government.
This causes market failure as parties are acting for self interest, and so unwanted/inefficient outcomes can arise.

Legislation and regulation
Cigarette packages must by law have graphic photos of cancer patients so as to dissuade consumers from indulging in the product. This limits the negative externalities from demerit goods. However may cause lower profit margins for firms and subsequent layoffs. Also if certain practices are outright banned black markets can arise.
Provision of Information
Consumable products must have nutrition labels so that consumers can make informed decisions. Also makes it much more easier for consumers to see the costs and benefits. Ad campaigns can also be run and these can also be targeted to make it even simpler, however with this arises opportunity costs and the need for the information to be provided clearly or else it will be wasted.