TOPIC 5: GOVT'S MICROECONOMIC OBJ; MARKET FAILURE

Question 1

[Definition] Market Failure

Answer 1

Market failure occurs when the free market is unable to allocate resources efficiently.

Question 2

[MF 1 - Public Goods] 3 Characterisitics of public goods

Answer 2

1. Non-rivalrous
   - Consumption by 1 person does not reduce amt available to others
2. Non-excludable
   - Producers cannot exclude
3. Non-rejectable
   - consumer cannot reject

Question 3

[Definition] Externality

Answer 3

An externality is a spill-over cost / benefit borne by a third party due to the consumption / production of a good or service.

A third party refers to someone who is not part of the economic transaction and is neither the buyer nor the seller.

Question 4

[Definition] Information Failure / Imperfect Information

Answer 4

Information failure or imperfect information arises when economic agents lack critical information to make rational decisions on choices and resource allocation.

Question 5

[Definition] Asymmetric Information

Answer 5

Asymmetric Information refers to a situation where one party in the economic transaction have more information than the other party, resulting in a distortion of incentives and inefficient market outcomes.

Question 6

[Definition] Adverse Selection

Answer 6

Adverse selection arises when certain parties naturally select themselves out of a market, which gives rise to missing markets when these parties do not get to buy or sell the good, even though it may be beneficial for them to do so.

Question 7

[Definition] Moral Hazard

Answer 7

Moral hazard refers to a situation where an economic agent behaves in a way that is detrimental to society because the agent does not fully enjoy the benefits or bear the costs of his actions.

Question 8

Adverse Selection VS Moral Hazard

Answer 8

Both are due to asymmetrical information
- 1 economic agent have more info than the other

Adverse Selection
- Leave the market even though IT IS beneficial for them
- BEFORE the economic transaction
- Eventually leads to missing market

Moral Hazard
- Change actions which is ALWAYS detrimental
- AFTER the economic transaction
- Because don’t need to bear full cost / Not enjoying full benefit

Question 9

[Moral Hazard] Co-payment

Answer 9

Co-payment is the percentage of the insured loss that is paid by the insured for each and every healthcare service utilised by the insured.

Question 10

[Moral Hazard] Deductible

Answer 10

Deductible is a sum specified in an insurance policy that the insured individuals must pay before being compensated a sum.

Question 11

[Moral Hazard] Co-insurance

Answer 11

Co-insurance is the percentage of insured loss that is paid after paying the deductibles.

Question 12

[Definition] Equity

Answer 12

Equity can be defined as the fairness in the distribution of economic welfare.

Can be discussed from the perspective of equitable access to essential goods and services