Problem 1: For each of the following three scenarios state whether these are examples of moral hazard or adverse selection and briefly justify your answer: a) When purchasing a house, there may be dry rot in the walls that the seller knew about but did not report. b) If governments are known to bail out banks that lose money, banks may have less incentive to carefully screen borrowers to make sure they are likely to repay their loans. c) Some doctors may overprescribe treatment and diagnostics compared to what is reasonably justified because their patients are covered by insurance, and so do not pay the full cost of treatment, while the doctor faces legal risk if the patient is undertreated but not if they are over-treated. Assume that the insurance company cannot tell whether a treated is justified in a particular case and must rely on the doctor's judgement.

Problem 1: For each of the following three scenarios state whether these are examples of moral hazard or adverse selection and briefly justify your answer: a) When purchasing a house, there may be dry rot in the walls that the seller knew about but did not report. b) If governments are known to bail out banks that lose money, banks may have less incentive to carefully screen borrowers to make sure they are likely to repay their loans. c) Some doctors may overprescribe treatment and diagnostics compared to what is reasonably justified because their patients are covered by insurance, and so do not pay the full cost of treatment, while the doctor faces legal risk if the patient is undertreated but not if they are over-treated. Assume that the insurance company cannot tell whether a treated is justified in a particular case and must rely on the doctor's judgement.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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