Question

Only two paragraphs with one credible reference.

What is the problem of asymmetric information?  Why is it so important to understand this problem?  What is the problem of asymmetric information?  Why is it so important to understand this problem?

Many police officer positions require the applicant to have a college degree even though the tasks of a police officer rarely call upon college course material. Why don't police departments increase their applicant pool by dropping this requirement? As you answer this question think back to last week and the problem of Type 1 and 2 errors and the human tendency to be risk-averse.

Answer 1

Ans) Asymmetric information is a scenario in which there is an imbalance of knowledge between the two transacting parties. In simple words, when one party has different information to another, such a scenario can be termed as Assymetric information. And it can be highly inflammable or problematic when it leads to adverse selection in a market. It exists in almost all sorts of markets and economies; for eg. Labour markets, share markets, insurance markets, buying and selling second hand cars etc.

George Akerlof who was awarded the Nobel Prize for economics in 2001, states the importance of understanding assymetric information and problems related to it, since it could lead to adverse selection, with the price of a product being below its equilibrium price, as there is always an incentive lying behind an undervalued product.