Study Guide 2 Q. 8 and 9

8.) The fact that healthcare is a far cry from a perfect market sets up a chain of perverse incentives. What are these incentives?

Their is no free entry one cannot simply open a hospital. This gives health providers a degree of market power that compromises the competitive market - raises prices. Health care also offers "substantive positive externalities" The value to society of mass vaccinations far exceeds the profits that can be captured by the doctor or drug company. If vaccinations and other public health measures were left to private supply and demand, society would seriously underinvest. Society invests in other public health measures that markets underprovide. The health care system also depends heavily on extra-market norms—the fact that physicians and nurses are guided by ethical constraints and professional values that limit the opportunism that their specialized knowledge and power might otherwise invite.

9.) Explain how asymmetric info interferes with a market.

Asymmetric - a situation in which one party in a transaction has more or superior information compared to another. A situation in which the seller knows more than the buyer.(or reversed) Bad because one party can take advantage of another hence immoral behavior. Also creates a moral hazard, ex. one can commit arson because he has fire insurance.