24. Market Failures II: Informational Asymmetry

MIT 14.01 Principles of Microeconomics, Fall 2018
Instructor: Prof. Jonathan Gruber

This lecture covers the topic of social insurance, which is government-provided insurance programs. Prof. Gruber also discusses the social insurance standoff and social security.

License: Creative Commons BY-NC-SA

[arjunmahajan]

Information asymmetry: party with more information wins in a transaction .
Information asymmetry cause adverse selection.
Government solution in insurance market :
• Subsidization : Pay healthy people in benefit of taxes to take up health insurances, this is expensive.
• Make insurance mandatory, this will piss of healthy people Eg. employer has to give pay for their insurance to employees.
• Provide, this is super expensive.
When you insure people for risk this creates moral hazard, fayda uthayega insurance ka.

[NatapixAS]

Corona season has taught us a lot of this in the real world! 😬

[Jarlerus]

"In Europe they don't have that" is a gross generalization :I
There's countries here that have very similar systems as the US one.

[NostraDavid]

Being from the Netherlands: I know literally no one here over 55 that retired at 55. In 2024 the average was 66, and it's still increasing.

[defyingfinance]

Stopping at 18:00 there is so much more too It though. Government, inflation, crappy food choices, etc. if none of that existed it would be no different than any other free market like a lawn service company. If we have an epidemic of obesity from people making poor food choices causing the health issue, then maybe the attention needs to focus there so the costs across the board aren’t as high and many more would be insured. If a car insurance company sees you suck at driving then they don’t insure you due to your risk to the company. Why should a health insurance company be any different? Then you have moral hazard. You also have inflation making everything else more expensive relative to wages which government really creates along with the banking system. I don’t think you can fix that health care crisis without incentives to eat better and the government getting a life and getting out of the way.

[duncanhw]

Perhaps he meant France at 62yrs? There is no European country with a pension at 55, and the Netherlands doesn't give 90% of one's wage but rather 70% of _minimum_ wage (plus some other programmes)

[MinSeokSong-fd]

I'd say I enjoyed this lecture the most out of all the series, yet people also point out some info here isn't necessarily correct

[XelaOram-dgpf]

When speaking on the marginal value of leisure, is there also an opposite value in which people seem satisfaction in participation and productivity/creativity?

[TanCodeTV]

Bot Summary:

In Professor Jonathan Gruber's lecture at MIT on "Market Failures II: Informational Asymmetry, " he delves into the complexities of social insurance and its necessity due to certain market failures, specifically focusing on informational asymmetry. Gruber begins by explaining the rationale behind government-provided insurance programs, which are major components of government spending in the United States. He defines social insurance as government efforts to mitigate risks associated with health, employment, and other uncertainties through programs funded by taxpayers.

The lecture transitions into a discussion of information asymmetry, where one party in a transaction has more or better information than the other. This asymmetry can lead to adverse selection, a scenario where only those who expect to benefit from insurance (like those who are likely to require significant medical care) would opt into insurance, thereby driving up costs for insurers and potentially leading to market collapse. Gruber uses George Akerlof's "lemons problem" as an analogy, explaining how the used car market can fail when sellers have more information about the car's quality than buyers.

Expanding on this, Gruber explores the implications of information asymmetry in insurance markets. He discusses how private insurance markets can fail due to adverse selection, prompting government intervention. Government policies such as mandates (requiring everyone to purchase insurance) and subsidies (to encourage participation and help cover costs) are introduced as solutions to these market failures.

A significant part of the lecture is dedicated to discussing moral hazard, a situation where the behavior of insured individuals changes because they no longer bear the full cost of their actions. Gruber explains that social insurance, while beneficial in protecting individuals from financial devastation due to unpredictable events, also incentivizes less cautious behavior which can increase overall costs.

Gruber then specifically addresses the U.S. Social Security program, explaining its role as a form of social insurance that provides income to the elderly post-retirement, thus preventing poverty among the aged population. He discusses the funding mechanism of Social Security, the benefits it provides, and the challenges it faces with demographic changes such as increased life expectancy.

Throughout the lecture, Gruber emphasizes the trade-offs involved in government interventions in insurance markets. While such interventions can prevent market collapse and provide security against life’s uncertainties, they also have potential downsides like reducing incentives for maintaining employment or increasing costs due to higher risk behaviors. He concludes by stressing the importance of carefully considering these trade-offs when designing social insurance policies, aiming for a balance that minimizes negative impacts while maximizing social welfare.

[KingXKok]

But maybe if there weren't (as much) unemployment insurance people would be incetivised to save more?
(Not that I think its a good idea to ditch Unemployment Insurance but just putting this thought out there)

[walperstyle]

Is there any real economics classes out there from Thomas Sowell? The market does not fail, government fails the market.

[uhhwhat]

Hey Siri, how do I become a Netherlands citizen?

[jefflittle]

A lot of mistakes in this lecture and somehow all of the mistakes magically benefit multinational corporations.