Economics · Year 13

Active learning ideas

Information Gaps

Ever wondered why a brand-new car loses thousands in value the moment you drive it off the forecourt? This topic explores the powerful and often invisible role of information in how markets function, or fail.

• National Curriculum Attainment Targets
• A-Level Economics (AQA): 4.1.8.4 Information gaps
• A-Level Economics (Edexcel): 3.1.3 Information failure

• 20–30 min
• Pairs → Whole Class
• 3 activities

Activity 01

• Simulation Game
• 30 min · Small Groups

The Market for 'Lemons' Simulation

Students role-play as buyers and sellers of used cars. Sellers are secretly given a card indicating their car is a high-quality 'peach' or a low-quality 'lemon', while buyers only know the average probability. The resulting market price often drives out the 'peaches', clearly demonstrating adverse selection.

Explain how asymmetric information can cause market failure in the market for used cars.

Facilitation Tip

Debrief by plotting the prices offered against the actual quality to visually represent the market failure.

What to look for

Use mini-whiteboards for a quick-fire quiz. Present short scenarios and have students identify them as adverse selection, moral hazard, or neither.

• Apply
• Analyze
• Evaluate
• Create
• Social Awareness
• Decision-Making

Activity 02

• Simulation Game
• 20 min · Pairs

Moral Hazard Scenario Analysis

In pairs, students analyse short scenarios, such as having comprehensive vs. third-party car insurance, or a fixed-wage vs. a commission-based employment contract. They must identify the potential for moral hazard and explain how behaviour might change.

Analyse the concept of moral hazard and its implications for the insurance industry.

Facilitation Tip

Prompt students to connect the change in behaviour to the individual's perceived marginal cost of their actions.

What to look for

Set an A-Level style essay question, such as: 'Evaluate the view that market-based solutions, rather than government regulation, are the most effective way to overcome information failure.'

• Apply
• Analyze
• Evaluate
• Create
• Social Awareness
• Decision-Making

Activity 03

• Simulation Game
• 25 min · Whole Class

Government Intervention Debate

Assign groups to argue for or against a specific UK government policy aimed at reducing information gaps, like compulsory calorie counts on menus or Energy Performance Certificates for homes. This encourages students to develop evaluation skills.

Evaluate the effectiveness of government policies designed to provide consumers with more information.

Facilitation Tip

Provide a simple evaluation framework (e.g. effectiveness, cost, equity, unintended consequences) to structure the debate.

What to look for

Provide students with a rubric based on the learning objectives. They can RAG-rate (Red, Amber, Green) their confidence in defining, explaining, and evaluating each concept.

• Apply
• Analyze
• Evaluate
• Create
• Social Awareness
• Decision-Making

A few notes on teaching this unit

Start with Akerlof's classic 'Market for Lemons' as a clear and intuitive model for adverse selection. Use this as a foundation to introduce moral hazard, carefully distinguishing it as a post-transaction problem concerning behaviour. Use simple, relatable analogies before moving to more complex economic examples to scaffold understanding.

By the end of this topic, your students will be able to analyse real-world markets, from insurance to online shopping, identifying how hidden information distorts outcomes and evaluating potential solutions.

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Watch Out for These Misconceptions

• Adverse selection and moral hazard are the same thing.

  Adverse selection happens before a transaction due to hidden information about characteristics (e.g. only risky drivers seeking insurance). Moral hazard happens after a transaction due to hidden actions (e.g. someone driving less carefully because they are insured).

• Information failure only happens when one person has more information than another.

  That specific situation is called asymmetric information. A broader category is imperfect information, where both parties in a transaction lack full knowledge, which can also lead to poor decisions and market failure.

• Government intervention is always the best way to solve information gaps.

  Government intervention can suffer from its own failings, such as high administrative costs or creating unintended consequences. Market-based solutions like warranties, branding, and independent review sites can also be effective at reducing information gaps.

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Methods used in this brief

• Simulation Game