hi everybody it's all well and good according to traditional economic thought to understand that consumers will look to maximize their utility where marginal utility is equal to zero or when there are prices for goods and services where marginal utility is equal to that price but in the real world can something break down where consumers don't make rational utility maximizing decisions yes there is the notion of imperfect information can prevent consumers acting in a rational utility maximizing way one of the real world how can information be imperfect well in two ways there might be a lack of information maybe information doesn't exist at all maybe information isn't presented clearly the problem as a result could be an over consumption taking place or an under consumption taking place where consumers make irrational decisions two great examples are with the consumption of Merit goods and demerickers with Mary Goods there is not enough information out there which tells the consumer how good consuming that product is for them as a result Americans are under consumed things like Health Care education certain nuts for example if it's fruit and vegetables if it's healthy exercise these are all merry Goods but are under consumed You could argue because there is a lack of information regarding how good those products are for the individual consumer as a result irrational decisions are made when it comes to consumption under consumption takes place and that we can argue maybe is not utility maximizing a similar argument for demerit Goods there isn't maybe enough information out there as to how bad consuming these demerits Are For The Individual consumer demerit Goods like cigarettes like alcohol like sugary drinks like fast food as a result maybe more is consumed than should be more is consumed than is utility maximizing because there is a lack of information because maybe there isn't enough information at all or maybe because the information is not clearly presented the over consumption we could argue then is irrational if we're going Beyond utility maximization so lack of information can get in the way of utility maximizing according to traditional economic thought but also asymmetric information uh could get in the way of utility maximization asymmetric information is when the information does exist and it exists very well perfectly you might say but it's not being shared equally between two parties let's look at some real life examples well in labor markets we have a classic example of asymmetric information of imperfect information in this case between the employer and the potential worker the potential worker has got only all the information about how they are as a worker about how they work their productivity about the skills that they have about their work ethic the employer does not have that information and is trying desperately to get it but that's not necessarily going to be perfect in any labor market at all there is asymmetric information there as a result the employer may make an irrational decision to employ a worker right they may make a decision that's not necessarily maximizing their benefit because of the information not being equally shared the same argument for second-hand mark it's a famous example of George ekelov talking about the the issue of second-hand car markets where it's always the buyer that is lacking the information whereas the seller has all the information about the state of the car um but because the buyer doesn't necessarily have that information it's not being shared from the seller to the buyer the buyer may make an irrational decision to buy that car even though it won't maximize the utility of the buyer but also Insurance markets who has the information in Insurance markets stick with car markets here well a person that has the information is the drivers the car owner that car owner knows just how dangerous a driver they are but the insurance company doesn't have that information and therefore finds it very difficult to issue a price for that for that insurance a price on the insurance for that Individual Car Driver the insurance company is desperately trying to get all the information out of the car driver and therefore put a price on insurance for that car driver but it's very difficult for the insurance company to get the full information as there is asymmetric information for the individual there is always an incentive to under report the level of risk to under report how dangerous a driver they are to keep the price of insurance low that's no good for the insurance company and it may make irrational decisions being made where the insurance company actually issues Insurance to somebody or maybe it's too risky to do so or maybe the insurance company issues insurance at a price lower than what should be charged because and not enough information has been shared between the car driver and the insurance company something else you might want to bring in specific to Insurance markets it's the notion therefore a moral hazard if an insurer if a if an individual is gaining insurance but is not actually bearing the cost of taking risk the insurance companies bearing that cost that may lead to Hazard where the individual takes more risks because they are not going to bear the cost of those risks the insurance company is going to Bear those out that is not in the best interests of the insurance company at all it's not really in the best interest of society but it happens because you don't have the right person paying for the excessive risks that are being taken in this case the insurance company Bears the cost not the individual so here's an example of how imperfect information can take place and how imperfect information can lead to irrational decisions being made where utility is not necessarily being maximized in each case thank you so much for watching guys I will see you all in the next video