6 Information is needed for a market to operate efficiently. Buyers need to know the quality of the good or service to judge the value of the benefit it can provide. Sellers, lenders and investors need to know the reliability of a buyer, borrower or entrepreneur.
7 This information must be available fully to both sides of the market, and where it is not, market failure may result. This is known as 'asymmetry of information' and can arise in situations where, for example, sellers have information that buyers don't (or vice versa) about some aspect of product or service quality. Information asymmetry can restrict the quality of the good traded, resulting in 'adverse selection'. Another possible situation is where a contract or relationship places incentives upon one party to take (or not take) unobservable steps that are prejudicial to another party. This is known as 'moral hazard', an example of which is the tendency of people with insurance to reduce the care they take to avoid or reduce insured losses.