Chapter 3 – Tools of Normative Analysis
1. a. In this
particular insurance market, one would not expect asymmetric information to be
much of a problem – the probability of a flood is common knowledge. Moral hazard could be an issue – people are
more likely to build near a beach if they have flood insurance. Still, one would expect the market for flood
insurance to operate fairly efficiently.
b.
There is substantial asymmetric information in the
markets for medical insurance for consumers and also malpractice insurance for
physicians. For efficient consumption,
the price must be equal to the marginal cost, and the effect of insurance may
be to reduce the perceived price of medical care consumption. That would lead to consumption above the
efficient level. Because of the roles of
regulation, insurance, taxes, and the shifting of costs from the uninsured to
the insured, there is little reason to expect the market to be efficient.
c.
In the stock market, there is good information and
thousands of buyers and sellers. We
expect, in general, efficient outcomes.
d.
From a national standpoint, there is a good deal of
competition and information with regards to personal computers. The outcome will likely be efficient for
computer hardware. However, some firms
might exercise some market power, especially in the software market; in these
markets “network externalities” may be present where the value of a programming
language or piece of software is dependent on the number of others who also use
that software.
e.
The
private market allocation is likely inefficient without government
intervention. Student loan markets may
suffer from asymmetric information – the student knows better than the lender
whether he will repay the loan or default on it, a form of adverse selection. Government intervention does not “solve” the
adverse selection problem in this case (because participation in the student
loan program is not compulsory), but it may create a market that would not
exist without intervention.
f.
There
are several reasons why automobile insurance provision is likely to be
inefficient without government intervention.
As with other insurance markets, the automobile insurance market suffers
from asymmetric information. Drivers who
know they are particularly accident prone will be particularly likely to want
car insurance (or policies with greater coverage), while drivers who are less
accident prone (or able to self-insure) might choose to go without
insurance. By mandating that people purchase
auto insurance if they choose to drive, the adverse selection problem is
mitigated to some extent (but, again, more accident prone drivers could still
by more generous plans). Another market
1. a. In this
particular insurance market, one would not expect asymmetric information to be
much of a problem – the probability of a flood is common knowledge. Moral hazard could be an issue – people are
more likely to build near a beach if they have flood insurance. Still, one would expect the market for flood
insurance to operate fairly efficiently.
b.
There is substantial asymmetric information in the
markets for medical insurance for consumers and also malpractice insurance for
physicians. For efficient consumption,
the price must be equal to the marginal cost, and the effect of insurance may
be to reduce the perceived price of medical care consumption. That would lead to consumption above the
efficient level. Because of the roles of
regulation, insurance, taxes, and the shifting of costs from the uninsured to
the insured, there is little reason to expect the market to be efficient.
c.
In the stock market, there is good information and
thousands of buyers and sellers. We
expect, in general, efficient outcomes.
d.
From a national standpoint, there is a good deal of
competition and information with regards to personal computers. The outcome will likely be efficient for
computer hardware. However, some firms
might exercise some market power, especially in the software market; in these
markets “network externalities” may be present where the value of a programming
language or piece of software is dependent on the number of others who also use
that software.
e.
The
private market allocation is likely inefficient without government
intervention. Student loan markets may
suffer from asymmetric information – the student knows better than the lender
whether he will repay the loan or default on it, a form of adverse selection. Government intervention does not “solve” the
adverse selection problem in this case (because participation in the student
loan program is not compulsory), but it may create a market that would not
exist without intervention.
f.
There
are several reasons why automobile insurance provision is likely to be
inefficient without government intervention.
As with other insurance markets, the automobile insurance market suffers
from asymmetric information. Drivers who
know they are particularly accident prone will be particularly likely to want
car insurance (or policies with greater coverage), while drivers who are less
accident prone (or able to self-insure) might choose to go without
insurance. By mandating that people purchase
auto insurance if they choose to drive, the adverse selection problem is
mitigated to some extent (but, again, more accident prone drivers could still
by more generous plans). Another market
