Market Failure in Unemployment Benefits

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Market Failure In Provision of Unemployment Benefit

Market failure occurs when resources aren’t used efficiently. This can be seen in any market, whether a publics good or a private good. Market failure can also be seen in the provision of unemployment benefits and unemployment insurance, as the resources could be used inefficiently and misused in different ways. For the purpose of this essay I will focus on how MORAL HAZZARD, prevents the efficiency in unemployment benefits and insurance, I will discuss the main issues to do with moral hazard in unemployment and also ways of combating it. I will do this by firstly defining market failure and the main components on it before leading to the actual topic of moral hazard.
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Moral hazard is greatly seen as an individual can influence their probability of entering or leaving unemployment. Moral hazard creates a disincentive to work and reduces the supply of labour in a country. Moral hazard is unobservable , this means the providers of insurance and benefit are totally unaware of the unemployed intention while receiving the benefit. In unemployment insurance the two parties are involved in contractual relationships, as their intentions contradict. The receiver of the benefit is acting in a hazardous way and the insurer is fully on aware which makes the provision a market failure.
The money being received for unemployment benefit is substantially high in Ireland. This means that people are less willing to look for work as they have a good income already. Looking for work would mean a loss of benefit or a reduce income due to tax which will reduce the incentive for a person to go look for work. Due to Moral Hazzard the system of payment are structured with a view to ensuring that the system of payments does not weaken the incentive of the unemployed to take on paid employment. Income tax and social security contributions levied on earnings determine the employee’s net earnings, when unemployed a worker receives payments. If the gap between this is too much it may affect the incentive to work. If the ratio is high then moral hazard increases as those who are unemployed may cease to work.

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