Exchange Rate Influences a Country’s Import and Export, Essay Example

Explain the nature and consequences of asymmetric information for each of the following cases. What options are available in each instance to reduce the problem? 

Asymmetric information is an occurrence in an economic transaction where one party is more knowledgeable than the other party. In health insurance, asymmetric information can be attributed adverse selection in certain circumstances. Adverse selection occurs when economic decisions of an individual are suppositiously worse than they would have been had all involved parties demonstrated symmetrical information. The consequence of asymmetric information in health insurance is the susceptibility of medical insurance because individuals deemed unhealthy or at the high risk of health such as the vulnerable population, the elderly, and the smokers need relatively more health insurance covers than the healthy people. Moreover, these situations contribute to high insurance premiums for all medical clients and this might force the healthy population to back away. Therefore, a premium will be too low if it is based on the occurrence of claims among the general populace. In this context, remedies such as denial to provide coverage of the pre-existing conditions, medical histories, as well as medical examinations could help to mitigate the problem. Insurance screening and actuarial work needs to be performed to ensure customers are charged different premiums in accordance with their related potential risks.

Since sellers have knowledge regarding the quality of cars in the market as opposed to buyers, this ground provides an adverse selection of asymmetric information. However, the case of used automobiles can be expressed through segmented markets based on the quality of vehicles. For instance, there are two different qualities of cars in the market, that is, lemons and gems. Gems are high-quality and properly maintained cars and may not require repair. On the other hand, lemons are low-quality cars and poorly maintained and will need repair. The consequence in this scenario will be that potential customers with the ability to purchase these products are likely to consider gems as of substandard quality. As a result, the prices get depressed and further reducing the availability of high-value cars in relation to the number of vehicles that would exist with better information. Buyers will be willing to spend on high-quality lemons despite their higher prices. The primary solution to this type of condition in the market is for sellers to deal exclusively in products with high quality and offer warranties on their items.

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