In a market with asymmetric information,hidden actions exist if ________.
A) the buyer or the seller takes actions that are relevant for, but not observed by, the other party
B) the production or consumption of a good gives rise to positive externalities
C) the production or consumption of a good gives rise to negative externalities
D) the value of a good to a seller is greater than its value to a buyer

Question

Quizplus · Accepted Answer

Hidden actions exist in a market with asymmetric information if one party takes actions that are relevant for, but not observed by, the other party. This is also known as moral hazard. For example, an insurance company may not have perfect information about a policyholder's behavior and may not be able to observe whether the policyholder is taking actions that increase the likelihood of making a claim. This can lead to the policyholder taking excessive risks, knowing that the insurance company will bear the cost if a claim is made.

In a Market with Asymmetric Information,hidden Actions Exist If ________