Question

6) The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.

Answer 1

Answer:

Adverse selection; Moral hazard

Explanation:

Asymmetric information refers to a situation in which one person have more information about the other person while engage in a transaction.

Suppose there are a buyer and a seller in a insurance market. In this market, a buyer have more information than the insurance seller because he knows better about his health condition and how much he is involved in riskier activities. Therefore, this problem is known as adverse selection.

Moral hazard refers to a problem which occurs after the transaction has occured. It occurs when someone try to engage in riskier activities because he or she knows that other party bears the burden of cost if there is anything goes wrong.