ECO102H1 Lecture Notes - Lecture 23: Unemployment Benefits, Moral Hazard, Marginal Product
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ECO102H1 Full Course Notes
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Insurance and risk aversion leads to differentiation between consumers. What happens if insurance companies cannot tell who is high risk or low risk: assume only consumers know their true risk level, this a situation with private information, or asymmetric information. Low risk individuals may choose not to buy insurance. Overall risk level in the market increases. The market may unravel and the insurance premium would be k, with only high risk covered. Assume 100 people wish to sell cars: 50 people have plums . Buyer"s reservation price is : 50 people have lemons . In the full information equilibrium, plums sell for between -, lemons sell for between -1200. Assume buyers are risk-neutral, and willing to pay expected value of the cars. Average value = 0. 5() + 0. 5() = . Who would sell their car at that price: lemon owners would sell. Eco100y l0201: plums would not be willing to sell, only lemons would be offered for sale.
