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Reason 6 - Information failures
Information failures
Knowledge is never perfect!
Consumers lack information on things like:
• What goods are available and what new goods have recently come onto the market.
• What the quality of the different models or makes available is like.
• How long an item will last before breaking down.
Information lack is particularly common in both the health service and in education where consumers do not know much - although we now know more than a few years ago.
This lack of perfect knowledge means that we may choose badly through ignorance. The demand curves would be different, and better, if we did know everything. This means of course that the existing demand curves do not give us a perfect market solution.
Producers lack information on:
• What new demands are arising and how old ones are starting to change, so the producers may produce more (or less) than they should.
• What their existing rivals, and any new ones about to emerge, are doing or might do.
Which means that the producers may produce the wrong type of goods or the wrong quantity of goods.
We know that in the world in which we live, new firms start up and many die away within the first two years – they usually got it wrong on the demand for their service or goods in that particular place, although sometimes they simply were not good
enough at the job. In the process of being born and dying, the firms used up resources
(including the labour of the would-be entrepreneur) in a less than fruitful way.
Workers lack information on:
• All the jobs available now. Many of these will be local but more particularly they are usually ignorant of opportunities elsewhere in the country or in the EU for that matter. So the workers may not move to where they are needed though simple
lack of knowledge.
• Which industries will grow and which will wither away in the future. This means that workers may join a firm that will disappear in a few years time, throwing them out of work but not for any fault of their own. Technical change can render whole jobs out of date: the handloom weavers are a classic example of the late
18th and early 19th century; coal trimmers stacking the coal in the depth of ships
in the mid 20th century; and coal miners of the late 20th century. As a consequence of workers not being able to predict future job needs, resources may be tied up in dying industries too long.
- A real problem is that those leaving school or college may join an industry and train in skills that will shortly be no longer needed.
So here again the market does not reach the “correct” or optimal solution.
The response to information failures
Private firms gather information and try to sell it. For instance:
• Private job centres may open up to try to find a job for people. These are mostly in large cities and for service workers, rather than for manufacturing. Such firms are trying to improve the flow of information for profit.
• Magazines like “Which?” exist. They test and investigate the quality of goods and services and publish the results.
• Specialist magazines are produced for things like hi-fi, TV, motorcars, or computers – such magazines also test and report the results.
• In order to help producers, various trade associations and chambers of commerce gather information and inform their members about what is happening. They also organise conferences and set up fact-finding trips abroad and the like.
The state tries to provide information by:
• Establishing job centres.
• Providing advice to careers advisers in schools.
• Issuing pamphlets and working papers to try to improve peoples’ knowledge. The newspapers pick up this information and may publicise it.
Overall, as information improves, consumers adjust their demand patterns to favour what fits their needs best. Producers chose the most suitable and cheapest sources for their inputs. This of course means the market mechanism then works better to supply what people want and are willing to pay for.