A digital platform is established for trading certified organic agricultural produce directly from smallholders to supermarkets. However, due to budget cuts, the platform suspends its third-party soil and crop testing program, instead allowing farmers to self-certify their produce as 'organic'.
Which of the following market-failure risks is a direct consequence of this information gap?
Adverse selection, as conventionally grown produce is falsely certified, driving genuine organic producers out of the market.
Moral hazard, as supermarkets reduce their quality control standards to save on operating costs.
Negative externalities, as the lack of testing leads to increased pesticide runoff in local water systems.
Market rigging, as farmers collude to artificially inflate the prices of both organic and conventional produce.
15 exam-style questions on Edexcel A A Level Economics 1.3.4 Information gaps. Each one has a worked solution and a mark scheme showing where the marks go.