Chapter5: Demand For Health And Medical Care
Section: Chapter Questions
Problem 3QAP
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Question
if a patient pays his surgeon before she performs the surgery, is this adverse selection or moral hazzard
Expert Solution
Introduction:
The adverse selection problem refers to the situation where the one party has more information about their product or their behaviours than their counter party with whom they choose to engage in a transaction with. Thus the party with less information may unwittingly choose to enter into a transaction with a defaulter.
The moral hazard problem refers to when one party has an incentive to default after the payments have already been made, and thus they might not have to honour the terms agreed upon before entering the contract.
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