APFIVE Asymmetric Information and Market Failure
Which of the following best describes how asymmetric information can lead to market failure?
Consider a market where sellers possess significantly more information about product quality than buyers. This information asymmetry can create a situation where high-quality products are driven out of the market.
A
It results in uniformly high prices because buyers are willing to pay more for uncertain quality.
B
It forces market prices to adjust downward, eliminating any producer surplus.
C
It leads to overproduction and excess supply by encouraging all firms to produce low-quality goods.
D
It causes adverse selection and moral hazard, reducing incentives for honest disclosure and efficient contracting.
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