Question

Part II- Long Answers

1.When a smoker successfully manages to obtain insurance coverage as a non-smoker, what kind of market failure happens? Explain.

2.You really want a job as an economist. You think you are the perfect fit for the position and offer to work for much less than the job’s current salary posting. Do you think it a credible and right signal to your prospective employer? Explain

Answer 1

1. This market failure is called Adver selection.

Adverse selection refers generally to a situation in which sellers have information that buyers do not have, or vice versa, about some aspect of product quality—in other words, it is a case where asymmetric information is exploited. Here, the smoker has information that the insurer doesnt, hence its adverse selection.

2. In a job market, the company doesnt have all the information about a candidate. They have some information such as credentials, past work experience etc, but not all. The rest is a guess by them based on what signals the prospective employee is giving. These signals include credentials and past work experneice, but also include how much the candidate is asking as pay. Within reasonable range, a higher asking wage is a signal to emplyer that the employee considers himself/herself as worth it and is in high demand (thats why he/she is confident of asking such a high wage).

An offer of working at low pay is a wrong signal becaue it tells the employer that the employee does not have the right expertise or credentials and hence is ready to work for less. It makes the employer wary of hiring someone. Hence, its not a good signal.