Define and provide examples of each of the following What is

Define and provide examples of each of the following:

-What is market signaling?

-What is moral hazard?

-What is adverse selection?

Solution

Market signling refers to indication or information passed passively or unintentionally between participants in a market. For example, if a firm is offering buy one get one free, it indicates that firm is facing fall in sales and making ways to sell more.

Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. In other words, it is a situation where there is a tendency to take undue risks because the costs are not borne by the party taking the risk.

For example, if a person parks a car in unsafe place because it is insured, is a situation of moral hazard.

Adverse selection is a term that refers to a process in which undesired results occur when buyers and sellers have access to different/imperfect information. The uneven knowledge causes the price and quantity of goods or services in a market to shift. This results in \"bad\" products or services being selected. For example, if a teacher charges same fee from all students, he is making a loss as different students have different utility for his services and their paying capacity also varies.