1) Identify a product that you have consumed in the past couple of months and ex
ID: 1095560 • Letter: 1
Question
1) Identify a product that you have consumed in the past couple of months and explain what makes the product a public good, based on the characteristics of a public good as defined in this week's textbook readings.
2) In 2020, a leading insurance company started a policy that pays policyholders a 5 percent rebate on their insurance premium in a year in which the policyholders do not file an insurance claim. For example, a household with an annual premium of $1,200 will get a $60 rebate check each year it does not file a claim. Identify what problem(s) the insurance company is trying to solve by introducing this policy.
Explanation / Answer
1. A product that one individual can consume without reducing its availability to another individual and from which no one is excluded. Economists refer to public goods as "non-rivalrous" and "non-excludable". Example of public goods are park, highway, public library which are non rivalrous and non-exludable. these goods are not pure public goods as in some sense they effect tge utility level of others, like in park by creating congestion.
2.
An information asymmetry exists when one participant in a market transaction knows more than another in ways that pertain to cost or price. Such asymmetries abound in health insurance. Individuals have private knowledge about expected utilization that insurers lack, leading to adverse selection. By charging higher price for the insurance keeps the pricing high for every one and then giving back the rebate to low use users give the advantage of marginal pricing. Higher value customers who doen't file claim are charged less according to their use, while the one who claims insurance are charged high. this method of pricing solve the problem of information asymmetry.
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