Question

Answer the following questions, please be thorough in your response.

1.Why do you think that moral hazard exists in insurance markets and how can it be reduced?

2 Discuss an example of market failure and whether the government has been effective in implementing policies to correct it.

3 Give an example of a positive and negative externality and what regulations the government would use to correct the negative externality?

4 Choose a product protected by intellectual property rights. Discuss the advantages and disadvantages of that product being protected.

Answer 1

1)

Under the insurance, the adverse outcomes are protected thus insurance holder does not take pain in reducing the risk of negative outcomes. The moral hazard leads to the rise in risky behavior.

Following actions can be taken to address the problem of moral hazards:

• Co-insurance: The policyholders must be made to provide the part of insurance cost. For example, only 90 % of damage is paid by the insurance providers, and the rest of the amount is borne by the policyholder.
• Deductible: It is initial expenditure that is made by the policy holders.

2)

Market failure exists where the market system does not deliver the efficient result, The demand and supply forces do not truly reflect the actual demand and supply conditions prevailing in the market.

Following are the causes of market failures:

Asymmetric information.

Monopoly

Externalities.

Public goods.

Government intervention is required to correct the market failure, but government can not always correct the market failure precisely. The negative externalities of pollution is an example of market failure. Government can impose the tax to correct the market failure here.