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PAM 2000, Week 11 Notes

by: Eunice

PAM 2000, Week 11 Notes PAM 2000

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About this Document

Asymmetric Information Market Efficiency
Intermediate Microeconomics
McDermott, E
Class Notes
Microeconomics, PAM
25 ?




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This 2 page Class Notes was uploaded by Eunice on Saturday April 16, 2016. The Class Notes belongs to PAM 2000 at Cornell University taught by McDermott, E in Fall 2015. Since its upload, it has received 13 views. For similar materials see Intermediate Microeconomics in Political Science at Cornell University.

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Date Created: 04/16/16
PAM 2000 McDermott Spring 2016 April 12, 2016  Asymmetric Information o symmetric information: everyone is equally knowledgeable or equally ignorant about prices, product quality and other factors relevant to a transaction o asymmetric information: one party to a transaction has relevant information that another party lacks  hidden characteristics: an attribute of a person or thing that is known to one party but unknown to others  hidden actions: an act by one party to a transaction that is not observed by the other party o opportunistic behavior: one party takes economic advantage of another when circumstances permit o problems  adverse selection: occurs when one party to a transaction possesses information about a hidden characteristic that is unknown to other parties and takes economic advantage of this information  consumers may not make purchases to avoid being exploited by better-informed sellers (reaction)  potential consumer and producer surplus lost  moral hazard: an informed party takes an action that the other party cannot observe and that harms the less informed party o market is efficient when goods go to the people who value them the most o quality  externality: a firm doesn’t completely capture benefits from raising the quality of its product o reducing adverse selection  restrict ability of the informed party to take advantage of hidden information  equalize information among the parties April 14, 2016  Efficiency o in markets without perfect information, we have a couple definitions of efficiency  allocation is efficient if it maximizes ex ante expected surplus  before the event  (ex post efficient)  after the event o health insurance example  risk averse consumers (trying to avoid the potential for paying large bills due to sickness)  market is efficient when the healthy are willing to participate in the market (along with the sick)  expected cost  3000 for healthy  9000 for sick  willingness to pay  5000 for healthy  12000 for sick  efficient price? 5000  equilibrium price at 50% sick? 12000  expected cost = 6000, so healthy won’t pay  so charge max that the sick will pay  check the net profit given the consumers’ percentages  inefficient  equilibrium price at 20% sick? 5000  expected cost = 4200  charging at max the healthy will pay gives the firm a profit o net surplus is always the same between 4200 and 5000, whether the consumers or the firm has it  efficient  cut off value in percentage?  9000x + (1-x)(3000) = 5000  33.333%


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