Markets often fix the information gap themselves. The better-informed side has a reason to prove it is honest; the other side has a reason to check.
Market solutions
Signalling
Sellers prove quality: a warranty, a brand, a degree.
Screening
Buyers check: a medical exam, a credit score, a test drive.
Reputation
Reviews and ratings share what past buyers learned.
Remember it as: Show it, check it, or ask others: three ways to close the gap.
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Where the stakes are high or markets fail to fix it, governments step in.
Government solutions
Regulation and legislation
Force disclosure: food labels, energy ratings, a car's history.
Licensing
Only qualified doctors and electricians may work.
Provide information
Public campaigns and official ratings, like food hygiene scores.
Compulsory insurance
Everyone must join, so healthy people cannot drop out.
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Match the fix to the problem.
Which fix, where?
| Problem | Market fix | Government fix | Weakness |
|---|---|---|---|
| Used cars (adverse selection) | Warranties, reviews | Disclosure laws | Small print, fake reviews |
| Health insurance (adverse selection) | Medical checks | Compulsory insurance | Less choice |
| Banks (moral hazard) | Hardly any | Capital rules | Lobbying, costly to enforce |
The points to remember
- High stakes and buyers who cannot judge quality: regulate.
- Low stakes: warranties and reviews may be enough.
Paper 1 asked this in November 2022, as part (b) for 15 marks.
Evaluate the policies a government can use where asymmetric information is significant.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
How the 15 marks are given
| Marks | What your answer needs |
|---|---|
| 13–15 | Theory fully explained, terms right all the way through, balanced evaluation, real examples fully developed to support the argument |
| 10–12 | Theory explained, terms mostly right, evaluation mostly balanced, real examples developed |
| 7–9 | Theory partly explained, some evaluation but one-sided, examples partly developed |
| 4–6 | Theory only described, evaluation superficial, examples only named |
| 1–3 | Theory stated but not relevant, no evaluation |