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EXTERNALITIES & ASYMMETRIC INFORMATIONGroup 1 Members: Reg. Numbers

Ainembabazi Patience J12B27/003

Otritia Angelo J12B27/609

Mary Badawi J12B27/110Kirunda Daniel J12B27/316

Nassejje Justine J12B27/505

Jackson Mwakapugi J12B27/291Jeniffer Makau J12B27/423

Umulissa Prossy J12B27/861

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HEALTHCARE MARKET VS. OTHER MARKETSHealthcare has distinctive features whichare; Uncertainty (irregular demand & uncertain)-

Externalities

- E.g. Cholera outbreak

Information problems- e.g. asymmetricinformation

Insurance

Restrictions on competition The role of equity and need

Government subsidies and publicprovision

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EXTERNALITIES Externalities-are third party effects arising from

production and consumption of goods andservices wherein the third party receives noappropriate compensation.

Externalities occur outside the market because

they affect third parties

that is agents withoutdirect involvement in the production andconsumption of a particular good or service.

In economics, an externality is an effect from oneactivity which has consequences for another

activity but is not reflected in market prices. Externalities can be either positive, when an

external benefit is generated, or negative, when anexternal cost is generated from a markettransaction.

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EXAMPLES Drugs and alcoholA York University study says heroin and

crack cocaine addiction costs the UK 19 billion a year, witheach addict costing 600 per week in crime costs and courttime, health care and unemployment benefits. Also, excessivedrinking is on the rise in the United States and the UK, costingmillions of dollars in health care costs and tens of thousandsof drinking-related deaths each year.

Drinking (alcohol) is also an issue in UG- 4th in the world

Individual behaviors (smoking, over eating) Direct impact on health of person and others

Impacts the cost of health premiumsi.e. lung cancer

Impact on demand for health care

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ASYMMETRIC INFORMATION Asymmetric information: This is a

situation where there is imperfectknowledge. In particular it occurs whereone party has different information toanother

Asymmetric informationWhen we are sick we dont understand the

treatment we need and must trust our doctor intheir diagnosis.

Different doctors may suggest differenttreatments due to uncertainty of outcome.

Hard to judge quality

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ASYMMETRIC INFORMATION IN FINANCIALMARKETSAsymmetric information is a problem in

financial markets such as borrowing andlending. In these markets the borrower has

much better information about his financial

state than the lender. The lender hasdifficulty knowing whether it is likely the

borrower will default e.g. in Banking

Not all information is told to the Borrower(hidden charges)

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ASYMMETRIC INFORMATION IN INSURANCE

People buy insurance to cover themselvesagainst many risks e.g. illnesses

Treatment recommendations are adjusted toinsurance status.

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REFERENCES

http://www.businessdictionary.com/definition/

externalities.html#ixzz2Lzgn9Xtt

http://www.economicshelp.org/dictionary/a/as

ymmetric-information.html

http://www.colorado.edu/ibs/hb/barham/cours

es/econ4646/

http://www.businessdictionary.com/definition/externalities.htmlhttp://www.businessdictionary.com/definition/externalities.htmlhttp://www.economicshelp.org/dictionary/a/asymmetric-information.htmlhttp://www.economicshelp.org/dictionary/a/asymmetric-information.htmlhttp://www.colorado.edu/ibs/hb/barham/courses/econ4646http://www.colorado.edu/ibs/hb/barham/courses/econ4646http://www.colorado.edu/ibs/hb/barham/courses/econ4646http://www.colorado.edu/ibs/hb/barham/courses/econ4646http://www.economicshelp.org/dictionary/a/asymmetric-information.htmlhttp://www.economicshelp.org/dictionary/a/asymmetric-information.htmlhttp://www.economicshelp.org/dictionary/a/asymmetric-information.htmlhttp://www.economicshelp.org/dictionary/a/asymmetric-information.htmlhttp://www.businessdictionary.com/definition/externalities.htmlhttp://www.businessdictionary.com/definition/externalities.htmlhttp://www.businessdictionary.com/definition/externalities.html