Homework 1
MBA 614 – Jin
Christian Schwamberger
Paper # W2
Word Count: 505
I. In response to the possibility of additional $27,500 fines for holding passengers on the tarmac for more than three hours, how would commercial airlines respond? What inefficiencies will result from this?
Even in situations when bad weather does not materialize, the airlines have stated that they intend to take strong action to avoid heavy fines for holding customers on the tarmac for more than three hours. These new rules may result in certain inefficiencies even though their goals are to enhance the traveler experience and raise airline responsibility. The rising demand for airlines to control their schedules and guarantee that flights
depart and arrive on time is one example of such inefficiency. The additional strain of managing the flow of travelers and aircraft on airport workers might result in further inefficiencies due to the new requirements. In addition, airlines could have to spend more on new technology and infrastructure to better control their schedules and stay out of trouble. This might result in greater
expenses and eventually higher ticket prices for travelers.
II. My secondhand automobile was sold lately. How could this transaction have added value if no new production took place?
When a producer takes inputs and produces an output with more value, they are rewarded. A producer will probably make more money if they combine inputs to generate an output that adds more value. My desire to sell was worth less than what the buyer was prepared to pay. Any price that is agreed upon between these enables a voluntary trade that is advantageous to us both. Value was produced since we are both better off.
III. Because people who wish to purchase flood insurance live in flood plains and cannot acquire it at affordable prices, the U.S. government subsidizes flood insurance. What inefficiencies result from this?
The subsidization of flood insurance by the US government distorts the real cost of living in a flood-prone location, which leads to inefficiencies in the insurance market. The cost of purchasing flood insurance is artificially lowered when the government provides subsidies. Because residences in flood-prone locations are cheaper due to decreased insurance costs, this may result in a rise in demand for properties in these areas. The increased demand for properties in flood-prone locations, however, may lead to further development in these areas, raising the possibility of flood damage and thus making the issue that the insurance is intended to solve worse. The government's subsidy of flood insurance misleads homeowners and developers about the actual danger of residing in flood-prone regions, which can increase the overall amount of damage caused by floods and encourage additional growth in these areas. Furthermore, there may be a moral hazard associated with the government subsidizing flood insurance as homeowners may be less inclined to take precautions to lower their risk of flooding if they are aware that their insurance would be funded by the government. As a result, there may be a rise in the overall damage that floods inflict since homeowners are less inclined to lower their risk.
