PAM 2000, Week 11 Notes
PAM 2000, Week 11 Notes PAM 2000
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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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