Information gaps

Imperfect and asymmetric information, over-consumption of demerit goods, under-consumption of merit goods, and how governments respond. Through the ban on disposable vapes.

Disposable vapes were banned in June 2025.

From 1 June 2025, it became illegal to sell disposable vapes anywhere in the UK, including Northern Ireland. Governments pointed to the rise in vaping among children, drawn in by bright packaging, sweet flavours and low prices, and to the litter from millions of single-use devices thrown away each week.

If people choose to buy something, why would the government stop them? One answer: they may not have the full picture.

Source: UK Government and devolved administrations (2025).

When people do not know enough.

Perfect information means buyers and sellers know everything relevant about the good: its quality, its price, its benefits and its risks. In reality information is often imperfect.

Asymmetric information is when one side knows more than the other. A used-car seller knows whether the car is reliable; the buyer does not.

Information gaps lead people to misjudge goods:

• Demerit goods, such as cigarettes, vapes and alcohol, are worse for people than they realise: over-consumed.
• Merit goods, such as education, healthy food and vaccinations, are better than people realise: under-consumed.

Assumption: people act on the benefit they expect, not the true benefit.

Think first

A 15-year-old tries a fruit-flavoured vape.

It is cheap, it tastes of mango and friends use them.

Compared with someone who knew all the facts about nicotine addiction, they are likely to:

Without full information about how addictive nicotine is, the benefit they expect is higher than the true benefit. They consume more than they would if they knew the facts. That is an information gap, and it is one reason disposable vapes were banned across the UK in June 2025.

Step by step

1. Consumers buy where the benefit they expect, the demand curve, equals the cost: Q1 at P1.

2. With full information about the harm, the benefit people would expect is lower: the true benefit curve. The gap is caused by the information failure.

   Check: For a demerit good, how does the true benefit compare with the perceived benefit?

   People underestimate the harm, so they expect more benefit than they really get.

3. With full information, consumption would be where the true benefit equals the cost: Q*. Because they over-estimate the benefit, people consume Q1 instead: over-consumption.

4. Each unit between Q* and Q1 costs more than it truly benefits the user. Adding them up gives the welfare loss: between the cost curve and the true benefit, from Q* to Q1. For a merit good, the picture is reversed: true benefit above perceived benefit, and under-consumption.

   Check: For the units between Q* and Q1, which is true?

   Between Q* and Q1 the cost curve is above the true benefit: each unit is worth less than it costs.

5. Asymmetric information can also stop a market working at all. If used-car buyers cannot tell good cars from bad, they will only pay an average price, so owners of good cars refuse to sell, and the market is left with mostly poor cars.

6. Governments have several ways to respond.

   Check: Which policy most directly closes the information gap in the used-car market?

   The failure comes from buyers not knowing what sellers know. Making sellers disclose the car’s history gives buyers that information, so good cars can sell for what they are worth.

7. How governments respond: provide information (health warnings, food labels, campaigns), regulate (age limits, bans on advertising, bans such as disposable vapes), tax demerit goods or subsidise merit goods, and require sellers to disclose information (MOT certificates for cars).

A common mistake

For a demerit good, people over-estimate the benefit, so the information gap leads to over-consumption: Q1 is to the right of Q*. Under-consumption is the merit good case.

Exam question

Explain how an information gap can lead to the over-consumption of a demerit good.

Model answer

A demerit good is a good that is more harmful to the person consuming it than they realise, such as a disposable vape.

[Diagram: S = MPC, demand based on perceived benefit, true benefit below it. Q1 where perceived benefit = cost; Q* where true benefit = cost. Welfare loss between the cost curve and true benefit from Q* to Q1.]

Consumers often lack full information about the harm, for example how addictive nicotine is, especially young people attracted by flavours and low prices. They therefore over-estimate the benefit of the good, and their demand reflects this perceived benefit rather than the true benefit.

Consumers buy where perceived benefit equals the cost, at Q1. With full information, they would buy where the true benefit equals the cost, at Q*. Because Q1 is greater than Q*, the good is over-consumed, and the units between Q* and Q1 cost more than they are truly worth, creating a welfare loss.

However, how far better information cuts consumption depends on the good: nicotine is addictive, so warnings may change little. Saying that people consume too much is also a value judgement, as some argue informed adults should be free to choose.