Question

Only two paragraphs with one credible reference.

What is the problem of asymmetric information?  Why is it so important to understand this problem?  What is the problem of asymmetric information?  Why is it so important to understand this problem?

Many police officer positions require the applicant to have a college degree even though the tasks of a police officer rarely call upon college course material. Why don't police departments increase their applicant pool by dropping this requirement? As you answer this question think back to last week and the problem of Type 1 and 2 errors and the human tendency to be risk-averse.

Answer 1

Ans) Asymmetric information is when one party possesses more information than the other party and gives comparative advantage to one over the other. There are two types of asymmetric information ÷

• Adverse selection- when one party possesses the information which other party does not. Example- Used car owner have more information than one who is buying.
• Moral hazard- When one party is more likely to take risk because the cost is borne by the other party. Example- Insurance

The above two are the example of negative impact of asymmetric information. And can lead to frauds.

It is important to understand asymmetric information because it may not necessarily be a bad thing. Rather, it is an outcome of healthy market economy. It is because workers will then strive to become more specialised and hence will become more productive.

Also when you have idea of negative impact of asymmetric information, you will be more careful while taking the decision.

2) Type 1 error- it is like false alarm. That the given condition is fulfilled while in reality it is not.

Type 2 error- is when test result indicates condition is failed but in reality it is successful or it is doing nothing when risk is actually present.

Although what we studied in college is not needed in police jobs, the criteria of completing graduation cannot be dropped because If job will be given before graduation, the candidate may not be able to take rational decisions and might implement laws in a wrong way or may think they are the law who can enforce anything and resort to force more often .

On contrary if a candidate has completed graduation, he becomes more skilled to resolve problems without resorting to force and they are more able to take rational decisions.

Hence they will be able to avoid both type 1 and type 2 errors while dealing with public.