Explain what may occur when a buyer and a seller have unequal amounts

Explain what may occur when a buyer and a seller have unequal amounts of limited information. Describe two different types of problems that may arise when asymmetric information exists.

What will be an ideal response?

ANSWER

Asymmetric information may lead to opportunistic behavior where the informed person benefits at the expense of the person with less information. Adverse selection may occur where the informed person benefits form the less informed person not knowing about an unobserved characteristic of the informed person. Moral hazard may occur if the informed person takes advantage of the less informed person through an unobserved action.