Module 15: Information, Risk, and Insurance
Section outline
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Every purchase is based on a belief about the satisfaction that the good or service will provide. In turn, these beliefs are based on the information that the buyer has available. For many products, the information available to the buyer or the seller is imperfect or unclear, which can either make buyers regret past purchases or avoid making future ones.This chapter discusses how imperfect and asymmetric information affect markets. The first module of the chapter discusses how asymmetric information affects markets for goods, labor, and financial capital. When buyers have less information about the quality of the good (for example, a gemstone) than sellers do, sellers may be tempted to mislead buyers. If a buyer cannot have at least some confidence in the quality of what they are purchasing, then they will be reluctant or unwilling to purchase the products. Thus, we require mechanisms to bridge this information gap, so buyers and sellers can engage in a transaction. The second module of the chapter discusses insurance markets, which also face similar problems of imperfect information. We cannot eliminate imperfect information, but we can often manage it.
Upon completion of this module, you will be able to:
- Analyze the impact of both imperfect information and asymmetric information
- Evaluate the role of advertisements in creating imperfect information
- Identify ways to reduce the risk of imperfect information
- Explain how imperfect information can affect price, quantity, and quality
- Explain how insurance works
- Identify and evaluate various forms of government and social insurance
- Discuss the problems caused by moral hazard and adverse selection
- Analyze the impact of government regulation of insurance
To achieve these objectives: [Edit these items to match your resources and activities.]
- Read the Module 15 Introduction
- Read Chapter 15 in the course textbook, Microeconomics.
- Complete Module 15 Discussion Forum.
- Complete Module 15 Quiz.
- For course instructors, list any other reading assignments here. [Include all reading assignments here that are outside of Moodle. Be as
concise as possible. More information can be included in the
third-party section below, if necessary.]
- Complete the [specific activities in the module. Include all in the order you want them completed.]
Module Pressbooks Resources and Activities
You will find the following resources and activities in this module at the Pressbooks website. Click on the links below to access or complete each item.
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Students mustMark as done
Chapter 15 of Introduction to Microeconomics
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Students mustMark as done
Module 15 In Class Group Activity (hide from students)
Course SLO 1: Identify the basic economic principles that serve as the foundation of economic analysis
Course SLO 2: Understand the interaction of supply and demand in determining prices and the role of prices in coordinating economic activity
Course SLO 3: Analyze the economic impact of government regulation, price setting, and taxes on consumers and producers
Module SLO: 15.2.1 – Explain how insurance works;
Module SLO: 15.2.3 – Discuss the problems caused by moral hazard and adverse selection.
Section 2 of the course textbook introduces moral hazard. This is where people may engage in riskier behavior because of insurance and the small losses one would expect from a risky behavior going wrong. For this discussion, your task is to:
- Describe an example of moral hazard that we may run into in the real world. Think of something that is legal and not inherently lethal, yet still demonstrates elevated risk for the participant who would likely act safer if insurance or protection was not available.
- Explain why someone might take this risky action. What are the benefits to the risky behavior?
- Explain what an insurance company may do to
reduce the likelihood that an individual would take this risk. Keep in mind,
that we cannot always just deny coverage if an individual is participating in
the risky behavior.
Instructor Notes:
One example involves football players and increased safety equipment. Since football players have high-tech safety equipment, they are not worried about getting injured. Since they are not as concerned about injury, they may hit harder, which increases the chances of a concussion. In general, we can think of any safety measure; if you feel safe, you may end up taking riskier actions than if you felt that you are in danger. Similar with insurance, I may take a riskier action more often if I am insured than if I am not.
The risky action could be a shortcut to getting a task done, necessary, or may be outright fun.
Tools available to insurance companies include deductibles, copays, and exclusions. All of these make it where the insured individual has to have some skin in the claims process.
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