SOLUTIONS TO SELF-CHECK QUESTIONS
15.1 The Problem of Imperfect Information and Asymmetric Information
- If the buyer and seller have different assessments of the quality of a good, or the costs that went into producing it, it can be difficult for them to agree on a price.
- A “lemon” is a good that is of very low quality, and where the quality cannot be verified until after purchase.
- Sometimes governments subsidize domestic industries that lose from trade, or help workers retrain for more competitive professions.
15.2 Insurance and Imperfect Information
- Some people will receive more benefits than they pay in premiums, while some will receive less, with the long run payments and benefits averaging out in the aggregate.
- An actuarially fair policy is one in which the average benefits paid out equal the average cost to the policy holder.
- Moral hazard is the observation that people behave in more risky ways when the cost of risky behavior is decreased.