Skeleton Notes #9 Flashcards
What is a pre-requisite for thriving, functioning, competitive markets?
the free-flow of information
What has the power to compromise or destroy markets?
Information Asymmetries
Where there is no free-flow of information, and one party might be able to use an information advantage to enter into exchanges that benefit that party at the expense of another
Information Asymmetries
What is adverse selection?
An information advantage that a buyer/seller has that gives them the ability to misrepresent a good/service/themselves
During adverse selection a person has incentive to _____________ when they buy insurance. Left unchecked an insurer that took on the customers will see that health costs are high and have to ___________. As a result the ________ people will keep insurance while the _____ people will leave. This leads to a _____ where only the unhealthiest people carry insurance.
hide costly health behaviors
raise premiums
unhealthiest
healthiest
death spiral
Why does a moral hazard occur?
Due to a lack of information about how/why someone behaves in a potentially harmful way – certain services/goods may lower incentives for healthy behavior
Adverse selection arise due to an inability to ______________. For instance if potential buyers do not know the real _______ of any used-car at a dealership
trust the quality
quality
In adverse selection a dealer sells cars at market price P. The seller is aware of the varying quality of the cars. At the market price P, they will only offer the cars of ________ that earn them a ____. They will not offer the ________.
Lower quality
profit
higher quality cars
over time the market learns that only cars of a certain __________ are available, and demand for these cars falls, leading to _____ P
lower quality
lower
When demand for these cars falls, the seller responds by offering only the ___________. Buyers later respond with even less ______. This continues leading to ________
lower quality cars
demand
market collape
Market collapse is the problem of ___________, where one party has incentives to __________ of their product
adverse selection
misrepresent the quality
(adverse selection prediction) riskier people will seek
more coverage
(adverse selection prediction) insurance companies will charge bulk markups for
additional coverage
(adverse selection prediction) insurance pools will unravel leading to
death spiral
A person who is higher risk is more willing to pay ___________ for insurance
more/higher premiums
if only people who participate in an insurance program are all high risk, _____ will rise, ______ will rise, and a _______ is possible
costs
premiums
death spiral
Insurers will attempt to account for this risk by _______ the price as someone attempts to buy more insurance
increasing
if insurance pulls unravel, this leads to a
death spiral
A _________ person is more willing to pay higher premiums for insurance. If the only people who participate in an insurance program are all __________, costs will _____, premiums will _____, and a __________ is possible
higher risk
high risk
rise
risk
death spiral
insurers will attempt to account for this risk by ________ the price as someone attempts to buy more insurance. This is a bulk markup where someone is charged more (per unit) when they buy/use __________.
This is unlike the typical bulk discount in toilet paper or other goods in large quantities where you pay______(per unit) the more you buy.
increasing
more insurance
less
A death spiral played out at Harvard University. LESS healthy subgroups will select__________ because they are more likely to need it. Healthier subgroups will ________ of higher-priced insurance because they are unlikely to need it.
HIGHER-priced insurance
OPT UT
segmenting a pool of unhealthy people into their own insurance is the first step to a?
collapse of that market (death spiral)
when it comes to death spirals, the ____________ predicts that the market will survive if there’s demand, a price ceiling doesn’t work, government regulation helps quality.
Akoroff Model
According to the Akoroff Model the market will survive as there is a high __________ for the good or service. Even at a very _________, people will spend money on inelastic goods.
need/demand
high price
According to the Akoroff Model, a _________ doesn’t work and likely makes the problem worse. THis government law that keeps the price of a good from rising keeps car or insurance prices under a certain level. For used cars, this will only serve car dealers to take out the top quality cars and leave only those under the price cap. The same for insurance companies, they will make the low-risk plan unappealing to high-risk people.
price ceiling
According to the Akoroff Model, government regulation can help by having ____________. Having these in the car market would disallow dealers from selling a car unless it meets certain standards. they would have to invest in a bit in fixing the car, then can sell it at a higher price that is indicative of the cars _____________.
quality standards
true quality
When talking about unknown quality in the insurance market, we are talking about the __________ of the Market. Just as low-quality care would be rejected in the market, ____________ would be rejected in the insurance market.
sick-level
high-risk customers
Despite the problem of adverse selection used-car dealerships still operate and insurance markets do not all __________. There are a number of reasons why markets still function in spite of the _______________.
spiral out of control
information asymmetry
Potential insurance customers may believe they are not as _________ as they actually are, they do not attempt to over-insure. OVERCONFIDENCE can be a countervailing force against ___________, since they misrepresent their own risk they underinsure.
unhealthy
adverse selection
potential customers know that they are unhealthy, but do not act on their knowledge by trying to get better _________. They may not think it is worth the bother, even if they could potentially find a _________.
insurance coverage
good deal
