EXTERNALITIES & ASYMMETRIC INFORMATION

Group 1 Members: Ainembabazi Patience Otritia Angelo Mary Badawi Kirunda Daniel Nassejje Justine Jackson Mwakapugi Jeniffer Makau Umulissa Prossy Reg. Numbers J12B27/003 J12B27/609 J12B27/110 J12B27/316 J12B27/505 J12B27/291 J12B27/423 J12B27/861

HEALTHCARE MARKET VS. OTHER MARKETS

Healthcare has distinctive features which are; Uncertainty (irregular demand & uncertain)Externalities - E.g. Cholera outbreak Information problems- e.g. asymmetric information Insurance Restrictions on competition The role of equity and need Government subsidies and public provision

EXTERNALITIES

Externalities -are third party effects arising from production and consumption of goods and services wherein the third party receives no appropriate compensation. Externalities occur outside the market because they affect third partiesthat is agents without direct involvement in the production and consumption of a particular good or service. In economics, an externality is an effect from one activity which has consequences for another activity but is not reflected in market prices. Externalities can be either positive, when an external benefit is generated, or negative, when an external cost is generated from a market transaction.

EXAMPLES

Drugs and alcoholA York University study says heroin and crack cocaine addiction costs the UK 19 billion a year, with each addict costing 600 per week in crime costs and court time, health care and unemployment benefits. Also, excessive drinking is on the rise in the United States and the UK, costing millions of dollars in health care costs and tens of thousands of drinking-related deaths each year.

Drinking (alcohol) is also an issue in UG- 4th in the world

Individual behaviors (smoking, over eating)

Direct impact on health of person and others Impacts the cost of health

premiums i.e. lung cancer

Impact on demand for health care

ASYMMETRIC INFORMATION

Asymmetric information: This is a situation where there is imperfect knowledge. In particular it occurs where one party has different information to another
Asymmetric
When

information

we are sick we dont understand the treatment we need and must trust our doctor in their diagnosis.

Different

doctors may suggest different treatments due to uncertainty of outcome. Hard to judge quality

ASYMMETRIC INFORMATION IN FINANCIAL MARKETS Asymmetric information is a problem in financial markets such as borrowing and lending. In these markets the borrower has much better information about his financial state than the lender. The lender has difficulty knowing whether it is likely the borrower will default e.g. in Banking Not all information is told to the Borrower (hidden charges)

ASYMMETRIC INFORMATION IN INSURANCE

People buy insurance to cover themselves against many risks e.g. illnesses Treatment recommendations are adjusted to insurance status.

REFERENCES

http://www.businessdictionary.com/definition/ externalities.html#ixzz2Lzgn9Xtt http://www.economicshelp.org/dictionary/a/as ymmetric-information.html

http://www.colorado.edu/ibs/hb/barham/cours es/econ4646/