A rational choice involves weighing the importance of alternative uses of land in different regions of the country. Because cost is nothing more than a missed opportunity, price is a measure of the value of the land in its most valuable alternative uses. What is the magnitude of the social loss resulting from the social planner's inability to recognize that A is the low-cost producer.
In Figure 9.4, the number of soldiers is Q0 and the social benefits are calculated in the “Limited Draft” column of the table. We start with the total earnings of soldiers and subtract the sum of the shaded rectangles. Each of these young people has an opportunity cost of joining, which is represented by one of the shaded rectangles.
An issue of great importance in the history of economic thought has been the social function of land rent. 14 The Fabian Society was a major contributor to British political discourse in the early twentieth century. If the supply curve for land is vertical, then all income earned by landowners is producer surplus, or rent (shaded area in panel A).
The total value of the country to its users is the sum of the 4 shaded rectangles.
Asymmetric Information
Then it can be for the reproductive benefit of every man to indicate his health with a long tail, even if the tail itself is a burden in everyday life. In the lemon market, one group of traders (in this case, the sellers) knows more than the other group (the buyers), and each uses the additional information to decide whether to participate in the market. Akerlof, “The Market for Lemons: Qualitative Uncertainty and the Market Mechanism,” Quarterly Journal of Economics.
This adverse selection problem occurs in various contexts and is particularly acute in the market for insurance. If First Bank needs to raise money quickly, it may sell your mortgage to Second Bank of Springfield. But now add another element to the story: Suppose some mortgages are riskier than others, and also suppose that the First Bank has better information than the Second Bank about which mortgages are riskiest.
In that case, the first bank will try to pass its "lemons" to the second bank; and the other bank anticipating this will be unwilling to act. In the problem of adverse selection, one group of people starts out at higher risk than the other. If the employer could be sure of getting what he pays for, he could offer a higher wage for better work, to the benefit of both employer and employee.
Without perfect monitoring, the market offers a number of partial solutions to the principal-agent problem. Another solution to the principal-agent problem is to severely punish employees who are caught truancy. An obstacle to this solution is that there are limits to the employer's ability to punish.
The principal-agent problem is a significant factor in the relationship between shareholders and corporate managers. This gives the CEO an incentive to take immediate actions that will raise the stock price 10 years into the future. Even if the company goes bankrupt, it is unlikely that the shareholder's lifestyle will be greatly affected.21 The director, on the other hand, may have a large personal stake in the company's success.
If you're concerned that your CEO isn't working hard enough, you'll want him to hold more stock in the company so that his efforts will be better rewarded. But if you're concerned that your CEO is being too cautious, you want him to hold fewer shares in the company so that he's willing to take on more risk.
Financial Markets
Much research is devoted to the methods people use to separate valuable information from this static, and the consequences of the inevitable imperfections of these methods. All the information from the past history of the stock is already embedded in a single number - the current price. This claim is more difficult to test than the claims of the Chartists, so the empirical evidence is less conclusive.
To them we dedicate a bit of financial folklore: The Fable of the Royal Head-Flipper. But Professor Sanford Grossman of the University of Pennsylvania has laid out a plausible scenario based on two related assumptions. The possibility that bad news is about to spread causes them (rationally) to sell immediately.
A social planner who knew all the market supply and demand curves would still lack much of the knowledge needed to replicate the operation of the price system. What are some ways an insurance company can try to reduce moral hazard? Although no one in the world has a background in chemistry or engineering, many have strong opinions (some for and some against) about whether planning permission should be issued.
Let's say the authorities actually banned price increases and somehow managed to ensure that their action did not affect the amount of ice in the area. Each lottery winner would receive a ticket that would allow them to buy a parking space, and these tickets could be bought and sold freely. Show the consumer surplus (earned by the parkers), the producer surplus (earned by the university), and the total value of the lottery tickets to the lottery winners.
Explain why the "as cheap as possible" assumption is overly optimistic and how it skews your deadweight loss calculation. One of the club's criteria for deciding who to accept is to favor those applicants whose income is high compared to that of other applicants. What are some of the consequences of prohibiting insurance companies from charging higher rates to people who are in high-risk groups for AIDS.
What are some of the consequences of banning insurance companies from requiring AIDS testing as a prerequisite for coverage? Many insurance companies sell group policies that cover all employees at a particular firm, or all members of a particular organization.
