Question

1.Sketch a graph of the perfect information equilibrium in an insurance market with two types of consumers, sick and healthy.

2?Why won’t the perfect information equilibrium work when health status is private information.

Answer 1

Answer 2.

Why won’t the perfect information equilibrium work when health status is private information?

      This question is particularly coming under the topic of Asymmetric information and adverse selection.

Here I’m trying to explain the concept of asymmetric information.

What is 'Asymmetric Information'

Asymmetric information, also known as information failure, occurs when one party to an economic transaction possesses greater knowledge than the other party. This normally manifests when the seller of a good or service (for ex. Insurance sector mainly or medical claim policy) has greater knowledge than the buyer, although the reverse is possible. In all these economic transactions involves information asymmetry.

Asymmetric information is the specialization and division of knowledge in society. For example, medical doctors typically know more about medical practice than their patients. After all, through extensive education and training, doctors specialize in medicine, whereas most patients do not. The same principle applies to architects, teachers, police officers, lawyers , engineers, fitness instructors, and other professionals.

One alternative to ever-expanding asymmetric information is for workers to study in all fields, rather than specialize in fields where they can provide the most value. Associated with this alternative are large opportunity costs and possibly a lower aggregate output, which would lower standards of living.

Another alternative is to make information abundantly available and inexpensive, such as through the internet. It is important to note that this does not replace asymmetric information.

And sorry can’t give you the 1^st question’s answer.