Question

1. Write short notes on the following concepts:

1. Adverse selection
2. Asymmetric information
3. Expenditure function
4. Externality
5. Prisoners’ dilemma
6. Property rights
7. Public good

Answer 1

a) Adverse selection- it refers to the situation in which either the seller or the buyer have more information than the other about the quality of the product.Such as in insurance,the buyers of the product have information so that he engages in activities and jobs which are dangerous and risky but the seller will have no information about it.So,the party which has less information will be at disadvantage.

b) Asymmetric information- it refers to the situation in which the either parties involved in the transaction will have imperfect information than the other.It can be either seller or the buyer of the product and is generally information failure.Example a teacher,doctor,engineer will have more information about the product or service being offered than their clients.

c) Expenditure function-Expenditure function refers to the minimum amount of money an individual has to spend to get some utility.An individual knows about the price of the goods and his utility function shows what goods he prefer over others so the expenditure function will show the amount of money to achieve the desired level of utility.

d) Externality-an externality can either be negative or positive outcome which is borne by the third party as a result of an economic activity.In this case the third party is not directly involved in those activities and the cost of an externality is difficult to measure.Such as when the factory is producing goods,the pollution will have negative effect on the nearby society.On the other hand, education is an example of a positive externality as educating one person will be beneficial for the society as a whole.