Podcast
Questions and Answers
What is moral hazard in the context of insurance?
What is moral hazard in the context of insurance?
- The lack of incentive to guard against risk when protected from consequences (correct)
- The process of calculating insurance premiums based on risk
- The act of selling insurance to individuals who do not need it
- The risk of not being able to afford insurance premiums
What is the main issue with asymmetric information in economic transactions?
What is the main issue with asymmetric information in economic transactions?
- It leads to higher economic growth
- It benefits the party with more information
- It causes market failure due to unequal access to information (correct)
- It leads to perfect competition
What is the result of imperfect information in the second-hand car market?
What is the result of imperfect information in the second-hand car market?
- Information imbalance leading to market failure (correct)
- The market becomes more efficient
- Buyers have more bargaining power
- Sellers have to lower their prices
What would happen to insurance premiums if insurers had complete information about individuals' risk profiles?
What would happen to insurance premiums if insurers had complete information about individuals' risk profiles?
In the context of insurance, what is the effect of moral hazard on premiums?
In the context of insurance, what is the effect of moral hazard on premiums?
What is a characteristic of a perfectly competitive market?
What is a characteristic of a perfectly competitive market?
What is a consequence of a monopoly?
What is a consequence of a monopoly?
What is an example of anti-competitive behavior in an oligopolistic market?
What is an example of anti-competitive behavior in an oligopolistic market?
What is a market structure where firms have varying degrees of market power?
What is a market structure where firms have varying degrees of market power?
What happens to consumer choice in a monopoly?
What happens to consumer choice in a monopoly?
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Study Notes
Imperfect Information
- Moral hazard refers to the lack of incentive to guard against risk when an individual or firm is protected from the consequences.
Examples of Imperfect Information
- Insuring a watch may lead to carelessness, as the individual is protected from the financial loss.
- Insurers may charge higher premiums if they know about this lack of incentive.
- This lack of information leads to market failure, resulting in higher premiums for all customers.
Asymmetric Information
- Definition: A situation in which one party in an economic transaction has more information than the other.
- Example: Second-hand car market, where the seller has more knowledge about the car's condition than the buyer.
- Market failure occurs due to this information imbalance.
Market Structures
- In a perfectly competitive market, no firm has market power, which benefits consumers.
Market Power and Failure
- Sellers in other markets have varying degrees of market power, leading to market failure.
- A monopoly, where a single firm has full market power, results in higher prices and lower quantity produced, limiting consumer choice.
Collusion and Anti-Competitive Behavior
- Oligopolistic markets can engage in collusion, abusing their power through anti-competitive behaviors such as price fixing.
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