ECO-2023 Study Guide - Final Guide: Cash Transfers, Tax Rate, Temporary Assistance For Needy Families
Document Summary
Exists when one party to a transaction has more relevant or better information than the other party. Increases the cost to the less informed person entering the transaction. 2 different types: moral hazard and adverse selection. 2 ways to deal with it: signaling, and screening. Ways to mitigate adverse selection: dealer warranties a seller of a good car is willing to offer a warranty because the seller knows it is unlikely to incur significant costs under the warranty. Screening: occurs when the less informed party takes actions intended to elicit private or hidden information from the better informed party: example: education (find those with more desirable attributes) Risk and the law of large numbers. Insurance: a way of pooling or sharing the risk. Insurance provides in which individuals can trade risk with one another. In insurance markets, individuals trade a large but uncertain cost for a small but certain cost.
