Does information asymmetry cause market failures? If so, how can these problems be mitigated?

Information asymmetry refers to the situation where one party has more information than the other party. The problem of asymmetric information captures the problem of adverse selection and moral hazard.

Adverse Selection implies a situation where the imperfect information between the buyers and sellers leads to an inefficient outcome.

Moral Hazard is also the result of imperfect information because one party takes risk because of the cost incurred by the other party.

Therefore, the imperfect information leads to the situation of market failure because the unequal information leads to economic imbalances.

For example a patient admitted in a hospital has less information about the exact situation of the heath and recovery than the doctor.

In this case, a doctor will diagnose the patient accurately otherwise the doctor will loose the goodwill.

To address the adverse selection problem, the producers can provide the opportunity of refunds, warranties to the consumer.