Final answer:
Asymmetric information refers to the situation where one party in a transaction has more information than the other. It can complicate setting a fair price due to potential distrust. Improved disclosure practices help mitigate the risks related to imperfect information, allowing transactions to proceed fairly.
Step-by-step explanation:
The concept of asymmetric information arises in situations where one party in a transaction, such as the seller or the buyer, possesses more information than the other concerning the quality of the product or service being exchanged. This imbalance can make it challenging to agree on a price, as the party with less information may distrust the other and fear making an unfavorable deal.
Buyers often are not experts in the quality and defects of items like gemstones, used cars, or professional services, just as employers and lenders can't be completely certain about the reliability of potential workers or borrowers. Therefore, to overcome issues arising from imperfect information, disclosure mechanisms may be implemented to reduce associated risks and enable both parties to proceed with the transaction confidently.
When sellers are increasingly required to disclose defects, which may not be apparent to the buyer, it helps to even out the information gap. This promotes a more equitable marketplace, addressing potential issues related to imperfect information in contractual agreements.