Chap003 - Chapter 3 - Tools of Normative Analysis Chapter 3...

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Chapter 3 - Tools of Normative Analysis 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.
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This note was uploaded on 12/18/2010 for the course ECON 2003 taught by Professor Tong during the Fall '10 term at Uni. Southampton.

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Chap003 - Chapter 3 - Tools of Normative Analysis Chapter 3...

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