Topic

Market failure and information

Health care markets rarely work like textbook markets. These concepts explain why, from externalities and public goods to the information gaps between patients, doctors and insurers that make agency and signalling so important.

Concepts in this topic

• Coase TheoremThe Coase theorem holds that, with clear property rights and no transaction costs, bargaining reaches an efficient outcome whoever holds the rights.
• ExternalityAn externality is a cost or benefit, such as antimicrobial resistance or herd immunity, that falls on third parties and is ignored by the person deciding.
• Information AsymmetryInformation asymmetry occurs when one party to an economic decision has more or better information than another, affecting choices, bargaining power and the efficiency of resulting outcomes.
• Information EconomicsThe branch of economic theory examining how the distribution of information among market participants affects outcomes, including adverse selection and moral hazard.
• Market FailureMarket failure occurs when markets do not allocate resources efficiently, as in health care through externalities, unequal information or insurance gaps.
• Price DistortionA deviation of a good's market price from the level that would prevail under efficient conditions, often caused by tax, subsidy, or regulation.
• Principal-Agent RelationshipAn arrangement in which one party, the agent, acts on behalf of another, the principal, whose interests may diverge due to differing incentives or information.
• Property RightsProperty rights are entitlements to use a resource, exclude others, take its income and transfer it, as with medicine patents or pharmacy contracts.
• Public Goods ProvisionThe supply of goods characterised by non-excludability and non-rivalry, which private markets tend to undersupply because individuals can benefit without paying.
• Quantity DistortionA deviation of the quantity produced or consumed from the level that would prevail under efficient conditions, often caused by price controls or insurance.
• Screening TheoryA body of theory analysing how an uninformed party can design a menu of options that leads individuals to reveal their private information through choice.
• SignalingAn action taken by an informed party to credibly convey private information to an uninformed party that could not otherwise be verified.
• Signaling TheoryA body of theory analysing how individuals with private information take costly actions to credibly reveal it in markets with information asymmetry.