Information basics
This occurs when people must make decisions without knowing everything.
What is imperfect information?
A “lemon” refers to this type of product.
What is a bad-quality product?
This is the regular payment made to maintain insurance coverage.
What is a premium?
Moral hazard happens when people take less risk because they are insured.
FALSE
Explanation: Moral hazard is when people take more risks because they feel protected.
This type of information problem means one side knows more than the other.
What is asymmetric information?
This market example is most commonly used to explain the lemon problem.
What is the used car market?
Insurance works by spreading risk across many people, known as this.
What is pooling risk?
Adverse selection happens when low-risk individuals are more likely to buy insurance.
FALSE
Correction: Adverse selection is when high-risk individuals are more likely to buy insurance.
This is the main issue caused by imperfect information in markets.
What is uncertainty?
In the lemon problem, this group knows the true quality of the product.
Who are the sellers?
This law says insurers must collect more in premiums than they pay out over time.
What is the fundamental law of insurance?
Deductibles and copayments help reduce moral hazard.
TRUE
Explanation: They make people pay part of the cost, so they behave more carefully.
This type of information problem does NOT give either side an advantage.
What is imperfect information?
Because buyers expect low quality, they are only willing to pay this type of price.
What is a lower price?
This type of risk varies based on behavior, choices, and luck.
What is individual risk?
Medicaid is a government program that provides healthcare for low-income individuals.
TRUE
Explanation: It helps cover medical costs for people with limited income.
This is the key difference: asymmetric information involves this, while imperfect information does not
What is an imbalance of information (one side knows more)?
This type of information problem best describes the lemon problem.
What is asymmetric information?
Insurance protects people mainly from this type of loss.
What is financial loss?
The Affordable Care Act was passed in 2000 to reduce healthcare costs.
FALSE
Correction: The Affordable Care Act was passed in 2010 to expand access to health insurance.