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In: Economics

What kind of problems are the following: Asymmetric information, moral hazard problem or adverse selection problem?...

What kind of problems are the following: Asymmetric information, moral hazard problem or adverse selection problem? Match each with the situations below.Government insurance on bank deposits may encourage banks to make risky loans.A woman anticipating having a large family takes a job with a firm, which offers exceptional childcare benefits.Doctors prescribing more healthcare than is necessary.

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Expert Solution

The problems of asymmetric information, moral hazard and adverse selection are the sources of market ineffeciencies.

  • Asymmetric information: One party has more or better information than the other when making decisions and transactions. The imperfect information causes an imbalance of power.
  • Moral hazard: A situation where there is a tendency to take undue risks because the costs are not borne by the party taking the risk.
  • Adverse selection: The process by which the price and quantity of goods or services in a given market is altered due to one party having information that the other party cannot have at reasonable cost.

The following situations can be categorised as below:

1. Government insurance on bank deposits may encourage banks to make risky loans - Moral hazard

2. A woman anticipating having a large family takes a job with a firm, which offers exceptional childcare benefits - Asymmetric information

3. Doctors prescribing more healthcare than is necessary- Adverse selection

Rahul Sunny answered 2 years ago
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