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17
Asymmetric Information, Voting, and Public Choice
McGrawHill/Irwin Copyright © 2012 by The McGrawHill Companies, Inc. All rights reserved.
Information Failures
• Asymmetric Information • Market failure
• Incomplete information for buyers or sellers
• Better information is too costly
LO1 17-2
Inadequate Information
Inadequate Buyer Information on Sellers
Causes underallocation of resources
Gasoline market
Licensing of surgeons
Inadequate Seller Information on Buyers
Causes underallocation of resources
Moral Hazard
Heavy costs on insurers
LO1 17-3
Adverse Selection Problem
Adverse selection defined:
• Second party incurs major costs due to lack of information
• Adverse selection happens at the time the contract is signed
• Prevents pooling of low and high risks • Eliminate adverse selection by
government requiring social insurance
LO1 17-4
Workplace Safety
• Expensive
• Workers have adequate information • Avoid unsafe workplaces
• Asymmetric information
• Firms have no incentive to improve workplace safety
•Government sets safety standards
LO1 17-5
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