Discuss the Terms Moral Hazard and Adverse Selection
Essay: Discuss the terms moral hazard and adverse selection. In your discussion you should consider the following: a) When does it arise? b) What are its consequences? And c) What can be done about it?
WORD COUNT: 2502
Today we live in the information age, characterized by the internet, social networking and twenty four hour news with a constant stream of information flowing between users. This has lead to an economy where buyers can get immediate access to information about rival products, via for example product comparison websites, and sellers can reach virtually an unlimited number of customers through the vast network of information distribution. (Mansfield, 2005)
Information in the economy and the role it plays in markets has then received increasing attention from economists, and in particular how information poses special problems in markets. Information for most part is easily accessible and once this information is known to one person, it is often available quickly to someone else, especially with the rapid dissemination tools available today. However some information is not easily accessible and where this is the case, economic markets can be prone to market failure, where the normal market allocation of goods and services is not efficient. Normally in the analysis of supply and demand, buyers and sellers have enough information to make informed choices, a perfect information world where there are fully informed buyers and sellers; this leads to markets operating efficiently, generating equilibrium quantity and price for goods and services. This is not so where there is a lack of information in markets, called asymmetric information. Asymmetric information is where one party either a buyer or seller, has better information than the other party during an economic transaction. The market failure is caused because one party can take advantage of special knowledge in ways that change the nature of the transaction, due to this special knowledge
WORD COUNT: 2502
Today we live in the information age, characterized by the internet, social networking and twenty four hour news with a constant stream of information flowing between users. This has lead to an economy where buyers can get immediate access to information about rival products, via for example product comparison websites, and sellers can reach virtually an unlimited number of customers through the vast network of information distribution. (Mansfield, 2005)
Information in the economy and the role it plays in markets has then received increasing attention from economists, and in particular how information poses special problems in markets. Information for most part is easily accessible and once this information is known to one person, it is often available quickly to someone else, especially with the rapid dissemination tools available today. However some information is not easily accessible and where this is the case, economic markets can be prone to market failure, where the normal market allocation of goods and services is not efficient. Normally in the analysis of supply and demand, buyers and sellers have enough information to make informed choices, a perfect information world where there are fully informed buyers and sellers; this leads to markets operating efficiently, generating equilibrium quantity and price for goods and services. This is not so where there is a lack of information in markets, called asymmetric information. Asymmetric information is where one party either a buyer or seller, has better information than the other party during an economic transaction. The market failure is caused because one party can take advantage of special knowledge in ways that change the nature of the transaction, due to this special knowledge
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