Question

1. Answer all parts (a), (b), and (c) of this question.
   1. [10 marks] Define and explain the concepts of moral hazard and adverse selection. Illustrate each concept with two examples: one in the context of new technology sale, the other in the context of new technology funding.
   2. [20 marks] Explain why asymmetric information may cause a market failure in the markets for selling new technology and the market for funding new technological development.   
   3. [20 marks] Propose and defend a solution to these market failures in each of the two markets (technology sale and new technological development funding). Point out any disadvantages as well as any advantages of your solution.   

Answer 1

A) Moral hazard- Moral harazads usually happen when there is an information failure between 2 people or if there is a change in the behavior of any one of the pary after coming into an agreement .Here one party provides wrong information as they think they might not face any consequences.

Adverse selection-it refers to a condition in which either buyer or the seller have more information about the product

*Poin to note-*

Adverse selection happens when information failiure is exploited.

B) Assmetric Information may cause may lead to a market failure in the markets for selling new technology and the market for funding new technological development because a buyer can only see the externals or the physical appearance and can not judge or know the internal or reliability of the product.

C) Giving warranties-  Giving warranty can avoid asymetric information this would build trust among the buyers.Moreoverr it assures them that the product is of a superior quality.

Setting standards- Industries should  set some standards that should be met,as this would maintain the high quality of products.