Information asymmetry is a problem when:
A) a buyer and seller have aligned incentives.
B) a buyer and seller have opposing incentives.
C) a market is highly efficient.
D) a market is highly inefficient.

Question

Quizplus · Accepted Answer

Information asymmetry occurs when one party has more information than the other, leading to an imbalance of power and potentially harming the disadvantaged party. In a situation where a buyer and seller have opposing incentives (such as in a used car sale), information asymmetry can be particularly problematic for the buyer who may end up with a lemon. In a situation where incentives are aligned, such as in an efficient market, information asymmetry may be less of an issue as both parties have similar information and goals.

Information Asymmetry Is a Problem When