Meyer describes the “Tragedy of the Commons.” The IMF article explains how this type of problem is an example of an “externality.” What is an externality? What might be a good government policy to solve the problem of the environmental externality that leads to high greenhouse gas emissions?
Moral Hazard and Adverse Selection
“Moral hazard” is a term often used in the context of peoples’ behavior once they have insurance. Szuchman and Anderson explore the idea of moral hazard in personal relationships. How would you define moral hazard? Provide an example of a moral hazard that you have observed in your own community or workplace.
How does moral hazard differ from adverse selection? Provide an example to illustrate this concept.
An externality is a cost or benefit that is not borne by the person or persons who create it. For example, if a factory pollutes the air, the people who live near the factory may suffer health problems, but the factory owners do not have to pay for those health problems.
Externalities can be either positive or negative. A positive externality is a benefit that is not borne by the person or persons who create it. For example, if a person plants a tree, the tree provides shade for people who walk by, but the person who planted the tree does not have to pay for the shade.
Negative externalities are more common than positive externalities. Some examples of negative externalities include pollution, traffic congestion, and noise pollution.
Government policies to solve environmental externalities
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