Asymmetric information, also known as "information failure," occurs when one party to an economic transaction possesses greater material knowledge than the other party. This typically manifests when the seller of a good or service possesses greater knowledge than the buyer; however, the reverse dynamic is also possible. Almost all economic transactions involve information asymmetries.The most common example of this phenomenon is in regards to purchasing a car. The buyer knows relatively little about cars and what to look for in order to make an informed decision, while the seller likely has intimate knowledge of different makes and models as well as which ones have been recently serviced or repaired. As such, buyers are often at a disadvantage when negotiating with sellers since they cannot be sure that they are getting accurate information from the other side.Information asymmetry can create serious problems in markets because it can lead to what economists call "market failures." When one party has more information than another, that person can exploit their advantage by demanding a higher price for their goods or services or by withholding important information altogether. This often leads to situations where buyers overpay for items due to not having all of the relevant facts available, or where sellers sell products that are not actually worth what they are asking for them. In either case, it is clear that asymmetric information creates significant distortions in market prices and undermines efficient allocation of resources
