Tag: Asymmetric Information
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Negative Externalities
Economic activities can impose unaccounted-for costs on society, known as negative externalities. These inefficiencies often lead to government interventions and have widespread implications, affecting issues as significant as climate change and public health.
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Adverse Selection
Adverse selection happens when one party in a deal knows more than the other, leading to unfair outcomes. This can be a big issue in areas like insurance, loans, and used car sales. While there are strategies to manage it, unchecked adverse selection can cause market problems and privacy concerns.
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Principal-Agent Problem
The Principal-Agent Problem occurs when a person (the principal) hires someone else (the agent) to act for them, but the agent may not always act in the principal’s best interest due to differing information or motives. Solutions involve creating better incentives and transparency.