Exam 23: Moral Hazard and Adverse Selection: Informational Market Failures

If the opportunity cost of sending a market signal if too great for risky people and low enough for safe people, there will exist a(n)

Co-insurance is an example of how a market failure due to moral hazard can be solved __________ government intervention.

Because of a moral hazard problem, a market will

Explain why insurance markets fail.

The amount any agent will have to pay in the event that the situation being covered by the insurance company occurs is called the co-insurance (deductible).

An example of market signaling in the auto insurance market is

If a reputation for bad service would ruin a restaurant, the owner of the restaurant cannot afford to hire

An insurance lacks the information needed to distinguish between safe and risky people and therefore charges everyone the same average premium. As a result, the ________ people will not buy insurance, and the industry will be selling only to ________ people.

What are the pros and cons of market signaling?

When the buyers and sellers in a market have different amounts of information, there exists asymmetric information.

A separating equilibrium is an equilibrium where different types play differently so their types can be inferred by their actions.

You are approved for an insurance policy that protects your truck. The next day you become a reckless driver. This is an example of

Does market failure due to moral hazard in the insurance industry mean that government must intervene?

Free-market advocates would never suggest using signaling to solve problems of adverse selection.

Market signaling does not produce

If employers cannot distinguish between good and bad workers, then the employers must offer all workers a wage that reflects the __________ productivity of all workers in the population.

Compare and contrast adverse selection in the insurance industry and in employment decisions.

Tipping is a(n) ____________ solution.

The existence of a separating equilibrium depends upon differences in

If an insurance company selects its risks from the population in an adverse way, the company will probably