Learn Before
Addressing Market Failures via Institutional Reform and Government Intervention
Asymmetric Information (Hidden Actions and Attributes) as a Source of External Effects
Problems of asymmetric information, such as hidden actions (moral hazard) and hidden attributes (adverse selection), can be understood within the framework of external effects. These information imbalances lead to situations where one party's actions or characteristics create uncompensated costs or benefits for another, which is a form of externality.
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Social Science
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CORE Econ
Economy
Economics
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
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Learn After
The Labour Discipline Model as an Example of External Effects
External Effects in Insurance Markets
Information Imbalance as an External Effect
In a market where sellers have private information about the quality of the product they are selling (a 'hidden attribute'), the presence of low-quality goods can reduce the price that buyers are willing to pay for any good, regardless of its actual quality. Why does this information imbalance represent an external effect?
Match each economic scenario with the term that best describes the underlying information problem which creates an external effect.
In a situation characterized by hidden actions, the resulting external effect arises because one party possesses unobservable characteristics before entering into an agreement, which negatively impacts the other party.
Analyzing Externalities from Hidden Actions
Evaluating Market Failure from Asymmetric Information
Evaluating a Policy Response to Hidden Actions
A firm hires a remote employee whose effort level cannot be perfectly monitored. The employee chooses to exert less effort than the firm expects, resulting in a lower-quality output. How does this scenario represent an external effect caused by asymmetric information?
Evaluating Policies to Address Information Asymmetry in the Restaurant Industry