Market failures is a broad topic, and it includes public goods, externalities, and asymmetric information. Let’s discuss a facet of a type of asymmetric information in which there is inadequate information involving buyers: the moral hazard problem. The moral hazard problem is the pattern in behavior where one party alters a behavior after a contract is signed or an agreement is made with another party that results in costs to that other party. Another way to think of it is Person A makes a deal with Person B, and then shortly afterward Person A changes their behavior due to the aforementioned agreement, and consequently Person B is harmed by Person A’s actions.
An example of the moral hazard problem provided by the textbook is that when a firm offers an insurance policy that pays a certain amount of money per month to people who suffer divorces, married couples take on that insurance and have less of an incentive to stay married, resulting in divorce and them collecting the insurance, ultimately making the insurance company lose money.
This concept can be further illustrated by the idea of teacher unions. Knowing that they can’t be fired, many teachers stop caring about excelling in their job of teaching students. This ultimately harms the students as their level of education is decreased.
This isn’t to say teachers are the only ones who abide to the moral hazard problem. Another example to illustrate the moral hazard problem is seniors. Once seniors are accepted into college, they have little incentive to keep their straight A’s and so put less effort in school. Although senioritis doesn’t really harm a second party, it could be argued that the amount of knowledge not gained during second semester will ultimately equate to less overall knowledge to help future innovations (but that’s a pretty big stretch).
The moral hazard problem is abundant everywhere, and that’s because people are naturally lazy and have a tendency to not want to do more work than they have to do. After all, if you’ve already been accepted into college, what’s the point in having perfect grades?
Great blog! This one really hit home for me and I agree with everything you said. I loved your example of senioritis and found it very relatable. I did not know much about teacher unions before reading this, and I have gained knowledge from this. While i'm not sure how strong of a case could be presented for the side that teachers are hurt by senioritis, I think it is possible. For example, if a school has a new teacher (lacking tenure) who has students do very well and then has their students drop significantly second semester, it would look bad for them.
ReplyDeleteGreat blog! This one really hit home for me and I agree with everything you said. I loved your example of senioritis and found it very relatable. I did not know much about teacher unions before reading this, and I have gained knowledge from this. While i'm not sure how strong of a case could be presented for the side that teachers are hurt by senioritis, I think it is possible. For example, if a school has a new teacher (lacking tenure) who has students do very well and then has their students drop significantly second semester, it would look bad for them.
ReplyDelete(Not sure when I posted that comment why it says it's from unknown?)
I really like this post. I found it very interesting. I like how you started with a broad topic and went to example of what you meant. I also really liked the fact that you went into moral hazards. I think that is a great topic to share. I think you could've expanded on this topic a little more and relate it to the teacher unions a bit more, it was a bit of jump for me to understand. In one of blog I talked a little bit about the school board being an monopsony which I think could relate to your idea of the teacher unions because the unions are what can balance out the wages for the laborers.
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