Question

Pose a question like following that with some kind of uncertainty. Maybe environmental tax?

An example :

Question: Why is unemployment insurance mandatory? I think this question pertains to the course because insurance is something that people buy to mitigate against uncertain outcomes. I suspect there might be some market failures due to moral hazard and/or adverse selection, and I would like to investigate these.

Answer 1

Unemployment insurance refers to the insurance coverage when a person goes unemployed. In this case, the person gets a predetermined monetary benefit and or perks during the period of unemployment. The unemployment insurance is mandatory because it gives a coverage of financial support and never lets the person drift away into the gulf of discouragement, negative psychological issues and illegitimate activities. Besides, it helps the economy as financial assistance as part of unemployment insurance, maintain the aggregate demand at a level that makes the firms to continue the supply and unemployment level does not increase. Hence, the unemployment insurance also prevents the creation of a cycle of vicious economic activities and economy sustains under the different economic conditions.

There can be a case of moral hazard as people willingly going unemployed can opt for the unemployment insurance and people having a scope of getting fired and becoming unemployed, can go for the unemployment insurance. To counter this scenario and resolve the problem of moral hazard and adverse selection, the insurance companies can ask for:

1. Past and existing employment details

2. Performance track record and history

3. Age, family size as well as income profile

The above information will help the insurance company to resolve the scope of market failure and bring efficiency in the market.

A new Question with uncertainty will be as follows:

What can be the probability of sustainability tax if the business environment goes for the eco-friendly policies and government come with stringent regulations? The uncertainty goes with the framework of the use of funds collected by the tax and the incentives issued to the firms following the stated policies.