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Economics of Asymmetric Information - Introduction

Welcome to the next lesson of this module where we will cover the issues of asymmetrical information within markets.

Asymmetrical information refers to the situations where, within a market, different agents have access to unequal levels of information. This can result in an imbalance of power which gives advantage to one side and detriment to another.
Commonly this takes effect in the financial markets, for example in insider trading where a person has information that may affect the share price of a company. This advantage can be used to extract returns that would be impossible to predict for someone without this special knowledge - this of course may result in losses for those not possessing the additional knowledge.
This same problem can occur in non-financial situations, so a discussion on moral hazard is also presented. Where one party may take advantage of their additional power from asymmetric information.

Applying this concept to other disciplines produces some interesting insights, hence discussion is presented in regard to the legal system as well as using the Coase theorem in regard to externalities.

Below are some goals and objectives for you to refer to after learning this section.

Goals for this section

  • To understand the meaning of asymmetric information.
  • To appreciate the application and importance of this concept in diverse fields.

Objectives for this section

To be able to:

  • Explain the meaning of asymmetric information
  • Understand the application of asymmetric information to financial markets
  • Appreciate the ways that the concept can be applied to other areas such as law and politics

Begin the Lecture