2.10 MARKET FAILURE-ASSYMETRIC INFORMATION

Question 1

Adverse Selection

Answer 1

A situation where one participant has more information than another before the transaction occurs.

Question 2

Moral Hazard

Answer 2

A situation where one participant takes on more risk because they understand they will not pay the consequences of that risk.

Question 3

Government Response to Asymmetric Information

Answer 3

Legislation-The government may try to ensure all parties have adequate access to information by legislation.
Regulation-The government may try enforce monitoring of industries to reduce the impact of the market failure.

Question 4

Signaling

Answer 4

When participants have more information communicate the information to the other party.

Question 5

Screening

Answer 5

When participants lack information force others to reveal information.