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Q: For each of the following situation, do the following: first describe whether it is a situation of moral hazard or of adverse selection. Then explain what inefficiency can arise from this situation and explain how the proposed solution reduces the inefficiency.

a. When you buy a second hand car, you do not know whether it is a lemon or a plum, but the seller knows. A solution is for sellers offer a warranty with the car that pays for repair costs.

b. Some people are prone to see dentist unnecessarily for minor complaints, and health maintenance organization do not know how urgently you need a dentist. A solution is of insurees to have to make co-payment of a certain dollar amount each time they visit a health care provider. All insurance are risk-averse.

c. When airlines sell tickets they do not know whether a buyer is a business traveler or a leisure traveler. A solution for a profit maximizing airline is to offer an expensive ticket that is very flexible and a cheap ticket that is very inflexible booked in advance and can not be changed.

Business Management, Management Studies

  • Category:- Business Management
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