GECON200-Topic #2: Asymmetric Information in Macroeconomics

Asymmetric information plays an important role in macroeconomics. There has been a great deal of public discussion regarding the expense of health insurance programs provided by the government (Medicare and Medicaid), as well as plans for rescuing distressed financial corporations (TARP and FDIC insurance). Recent criticism of government-provided health care by Liz Cheney, and a rebuttal by Jon Chait show just how vitriolic the debate can be regarding government provided benefits.

The justification for providing health care or financial market oversight is typically that the goods in question should be provided by the government because markets fail to provide a “socially optimal” level of protection. This however does not mean that the current level is ‘optimal’ from any perspective (See a recent opinion debate in the WSJ and Bloomberg).

Government programs exist to aid in solving asymmetric information problems. Federal deposit insurance represents an attempt at solving the “principal-agent” problem. Bank depositors (i.e., the principal) should watch after a bank (i.e., the agent) to see that they are investing their money wisely. Unfortunately, most people fail to understand that banks are actually lending their money to others, and even if they did, they probably wouldn’t understand how to monitor a bank. So, if the agent’s incentive is to take big risks to make a big profit, incentives are misaligned between the principal and agent. This misalignment leads depositors to underestimate the potential for calamitous failure of their bank when the market turns sour. Thus, deposit insurance guarantees that depositors are protected-to an extent-from the risk of bank failure. However, with deposit insurance in place, depositors no longer watch what the bank does, leaving regulators to play the role of watchdog. The recent example of bank failures in Cyprus shows that there is a limit to deposit insurance, especially when the banking system turns out to be a huge portion of your country’s economy.

Health insurance provided by the government (including Medicare, Medicaid, and Tricare) are all attempts at overcoming the problems of adverse selection in private insurance markets. Those who are either very risk averse or know they will likely need a lot of care are the first to line up to get health insurance coverage. Knowing that these individuals will cost a lot to cover, insurers would rightfully charge them very high premiums. By bringing all retirees and disabled individuals under one gigantic plan, both the healthy and unhealthy are covered. This brings down the average cost of coverage, while driving up the total cost substantially. The same logic is in place for the recently passed Affordable Care Act. If the government can lure almost everyone into a health insurance plan by taxing them if they don’t buy coverage, then average costs for an individual health care plan will come down. Since the ACA hasn’t gone into full effect yet, it’s hard to see the actual costs. The big point is this, poor elderly Americans would have little ability to pay for their health care if it were not for some government provided or charitably provided health insurance.

In private markets-like used cars or televisions-there are often privately provided solutions that avoid the reach of government. Warranties are able to offset much of the risk in products purchased in market transactions, while insurance allows those who are afraid of risk to pay to prevent possible outsized losses.

Questions you might answer:

  • Do you believe that the government should play a role in helping to solve particular problems of market failure? If so, provide an example where they have effectively solved the problem. Also point out some unintended consequences of the government intervention. If not, what could be done in order to solve the market failure? What is the consequence of non-action?
  • Give an example of a government action that was necessary/unnecessary. This can be a local, state, or federal example. Your example could be as simple as sidewalks or parks, or as complex as the F-35 joint strike fighter. Link your reasoning for the necessity of action based on the provision of public goods, private goods, market failure, asymmetric information, and/or cost-benefit analysis. Could a private market have provided the same level of support? Provide some empirical evidence to support your story.
  • With respect to government provided health insurance or financial market oversight, do you believe the government plays the proper role? If so, provide empirical support to your analysis. How big is the program? How many workers/bureaucrats are supported by a program? Could it be cut? Should it be expanded?
  • What are alternatives to the current deposit insurance scheme in the U.S.? Should we adopt a system similar to the EU? Cyprus? China? What are some other systems that could be used to prevent bank runs? What are recent examples of bank runs, even when there is deposit insurance? How has deposit insurance helped them? How has deposit insurance failed governments? (Hint: Think Iceland, Ireland, Cyprus, Spain, Italy…)

39 thoughts on “GECON200-Topic #2: Asymmetric Information in Macroeconomics”

  1. A major problem that previously faced our market system was that of asymmetrical information. In this situation, one party in an economic transaction has more information than the other, creating an unfair advantage. There have been multiple government attempts to eliminate these problems. One method is through lemon laws. “” defines the lemon law as something that governs how, where, and in what condition a good can be sold to a consumer. An example of a company that abides by these rules is “CarFax”. This company sells used cars, however if asked to see the” carfax”, the seller must provide the consumer with all the information about the car that the consumer may need to make a smart purchase. Another attempt at solving this problem is a warranty. This discourages sellers to sell a low quality good for a high quality price, because if the good breaks or is damaged, the customer receives a refund. discusses the idea that warranties are better for both the buyer and seller. Consumers are comforted with the fact that if the product they receive is faulty, they will receive some sort of refund, and buyers receive more business because it is understood that with a warranty offer, they are most likely selling a high quality good. Another example of the government trying to fix the problem of asymmetric information, found on, are licensing laws. Under licensing laws, certain companies are required to be licensed by the government in order to sell a specific good or service, this will help protect consumers from unknowingly purchasing a low quality good or service.

  2. I believe that the government should definitely play a role in helping to solve particular problems faced by different markets, but at the same time keep their distance and portraying their mixed economy role. According to an article by Andrew Hinson on “Governments can also use regulations to mitigate risk, promote efficiency by correcting market failures, and enforce property rights.” This article elaborates on these three ideas and how this government intervention can provide a good service to our markets. An example of this government intervention effectively solving a problem is when Microsoft was making computer manufacturers pay a per-machine fee for installing DOS and Windows on their machines. Along with this per-machine fee the Government found that some of Microsoft’s advantages in the market (marketing, successful products) prevented other companies from being able to enter the market as well, ultimately making Microsoft appear as a monopolistic company. Seeing as that Microsoft was not necessarily doing anything wrong, they were forced to change some licensing packages of its operating system to make it fair for some other companies to compete. The Governments assistance helps many companies however, the idea that the economy thrives on competition provides reason for the Government to allow freedom to companies to do as they wish and only play a role of assistance in particular incidences. As discussed previously, by the Government implementing the change of Microsoft licensing packages provided for more open competition with other private companies and enhanced the economy in the technology field. Some consequences that could occur due to this intervention though, one being the expansion of government controls. Instead of using government intervention the markets should naturally correct themselves, the government process is only to speed up the process and is unnecessary in many circumstances.

  3. The government should not help solve particular problems of market failure. Although many people think the governments role is to regulate and control all “corruptible” parts of the economy that is not necessarily their role. In fact, the economy one usually fixes these problems without government intervention and two by the government intervening they are often times pushing their own agenda in the process. According to Veronique de Rugy in her article “Is Market Failure a Sufficient Condition for Government Intervention?” on the website The Corner, an unintended consequence of government intervention is a “failed political process” where the politicians can not produce the ideal outcome for the market system like they promised. This is simply due to the fact that politicians do not have the incentives like entrepreneurs do to learn how to deal with profits and loss and the correct way to fix this. This can lead to the government bailing businesses out that will help them and not the economy in the long run. For example, the government bailed out GM not because it would help the economy but because GM would give the government warrants for common stock, preferred stock, and have to repay back its loan, which only increases the government’s role and ownership of that company preventing it from making more independent decisions. In fact if anything this bailout hurt the economy because in part of the deal with the government GM ended up “Reducing employment from 96,000 to 45,000 by 2012”. An alternative to solving the market failure instead of government intervention is private solutions such as “maintaining financial relationships or using credit-score systems”, according to de Rugy of The Corner. This would guarantee that only businesses with good credit can get loans and continue with their business and the government does not bail out and intervene in the other businesses. A consequence of this might be some businesses failing or some businesses maybe using the asymmetrical system to take advantage of consumers. However this is all part of competition and a free-market system. I would much rather have a government that regulates it self and have individual firms make decisions for their company based on their reasoning of what they think the losses and gains of their company would be in an asymmetrical world then one where the government assists and regulates companies to profit from and take advantage of the system.

  4. With respect to government provided health insurance, I believe that the government does not play the proper role. Under a 1968 federal law, all people looking for care in an emergency room must at least get minimal treatment and this law applies all hospitals that participate in Medicare. In a June 30, 2009 article in the New York Times, it reported that “An estimated three-quarter of people who are pushed into personal bankruptcy by medical problems actually had insurance when they got sick or injured.” People that can afford health insurance and go into bankruptcy may have to fall back on health insurance provided by the government any ways. Ezra Klein at the Washington Post explained that “The private insurance Market is a mess. It’s supposed to cover the sick and instead competes to insure the well.” This shows how the government is not doing enough about how the government provided health insurance is regulated.

  5. In order for a nation’s economy to keep growing, labor productivity must increase. For this increase to happen, workers must be healthy enough to come into work and put in their best effort. Although health is very important, it’s a slippery slope when it comes to the government providing health insurance to some of its citizens. It’s hard to tell who actually needs help in receiving health insurance, because of asymmetrical information. With Obamacare, the government is trying to decrease the amount of Americans without insurance, but with that comes increasing costs and more government policies regulating the market system. According to Reuters, with the healthcare plan, individual health insurance market will rise, increasing costs for men and younger people. Hubbard and O’Brian states that because of new expensive medical treatments and the aging population, programs such as Social Security and Medicaid could significantly increase federal spending up to 25.8% of GDP by 2085, in 2010 it equaled 10.4% of GDP. Is the rise in federal spending and increase in premium costs worth expanding health insurance to a greater amount of people? I do believe that everyone deserves to be healthy and to be granted the right of having health insurance. Unfortunately, with every citizen receiving health benefits, along comes increasing costs to the government and the rest of America. According to Bloomburg, the U.S economy is tank because the government gives too much money to the poor.

  6. I do not think there is any simple or easy way to prevent bank runs. Bank runs can cripple banks and financial systems and, once started, are notoriously difficult to stop. Freezing deposits have been a common policy response, simply to stop the bleeding. A second policy is often a rescheduling of payments, so that savers have to wait longer to take out money or pay a penalty for early withdrawals. Yet according to Zsolt Darvas, a researcher at Brussels-based economics think tank Bruegel says, “It is a major mistake to introduce the various limitations on payments and capital. It will most likely feed the fear among bank depositors that they will not be able to get their money.” People and corporates will take out everything they can whenever they can. In an article titled “There’s a Reason for Deposit Insurance,” by Roger Lowenstein he raised a point that I found interesting. I agree and believe that depositors in banks be made to suffer along with their investors, employees and customers. This may lower incentives of bank runs.

  7. One of the most poignant examples of a necessary government action would be the development of the Interstate Highway System. Implemented by President Dwight D. Eisenhower in 1956, the Interstate Highway System has been almost completely funded by the federal government and completely connects the continental states to one another. In initial studies conducted, costs for 33 of 35 industries fell by 24 cents for every dollar that was invested. The main benefit of the Interstate Highway System is the reduction of cost and relative ease of transportation. Currently, it is estimated that 70 percent of all freight tonnage is transported by tractor trailers that mainly travel along the Interstate Highway System. This represents about 5 percent of the U.S. GDP. Not only do America’s businesses rely on trucking, the industry also employs nearly 9 million jobs and is currently looking to fill a labor shortage, which can help unemployment. These figures put into context how beneficial the Interstate Highway System is to the U.S. economy. Although the total cost of the Interstate Highway System has been estimated to be $425 billion (in 2006 dollars) the overall benefit that the American economy has received because of it is far greater than that cost. It would’ve been extremely difficult for a private market to be able to handle costs of that magnitude and successfully construct roads that span across such a large distance. For those reasons, the Interstate Highway System was a necessary government action because it could not have been produced by a private market and its economic benefits to the United States economy far outweigh the cost it took to construct. ( and

  8. Throughout the history of the economic standing in America there have been numerous instances in which it was necessary for the government to step in and solve particular problems. Whether these problems concern healthcare for the less fortunate, job security for large bankrupted corporations, or bailouts of banks that have failed, it is right that the government aids these needy people because by neglecting help to those in need could lead to a huge chain reaction of negative effects on our economy as a whole. In the article Top 6 U.S. Government Financial Bailouts, Marc Davis discusses The Emergency Economic Stabilization Act of 2008, which is a bailout bill authorized the U.S. Treasury to buy risky and nonperforming debt from various lending institutions. In the article he states, “With the Treasury’s purchase of a bank’s or mortgage lender’s bad debt, the resulting cash infusion will restore liquidity – and hopefully, confidence – to the banking system. Lending between banks and to consumers and business ventures is then expected to resume, thus lubricating the wheels of the U.S. economy.” Without the aid from this government bailout a large number of debts that were unable to be repaid including mortgages, auto loans, and college loans could have led to a negative snowball effect on the economy which may have very likely caused multiple other people and institutions to be unable to repay their debts. In this case, the government took control of the situation in order to create stability and faith in repayment of debts.
    Unfortunately, these bailouts have some unintended consequences, for example these bailouts are politically unpopular to many because critics believe that the government should not play a role interfering in the free market. Also, if one major corporation or banking institution is bailed out this leads to other companies believing that they can act the same way and the government will offer them the same bailout deal if they screw up, which is not always the case.
    However, it is important for the government to help solve market failures because in these cases there is more at stake than just that one company that is in financial trouble. Almost every business in the economy is tied together, so the act of one large corporation falling could lead to a domino effect of devastating financial trouble for everyone through possible increases in prices and highly increased unemployment.

  9. While many people think most government spending occurs at a federal level they forget about all the money their local and regional governments spend as well. The new Metrorail expansion, the Silver line, was designed to relieve some of Northern Virginia’s traffic issues; mainly, the rush hour traffic in and out of the District. The new expansion would extend into Tysons Corner, Reston, Herndon, Dulles, Ashburn, and Leesburg. The object of the project was to spark development in edge cities such as Tysons Corner, Reston/Herndon, and Ashburn while providing access to Dulles International Airport. (
    There was a big hullaballoo about who was going to pay for what concerning the Silver line. The final budget break down came to: Fairfax County, Loudoun County and Airports Authority contribution is 25%; federal contribution is 17.1%, which is based upon a fixed FTA grant for Phase 1 of $900M; the Commonwealth contribution is 5.2%, which is based upon a fixed contribution of $275M consisting of non-toll road funding; the DTR (Dulles Toll Road) contribution provides the remaining amount, and is 52.6%. ( Unfortunately, the sequestration has cut $5 million in federal funding from the project, which raises concerns about where the rest of the needed money would come from. This main concern is already burdened with the fact that Phase one of the project is already over budget. (
    Although the Metro expansion is costing taxpayers a lot of money, the benefits here outweigh the costs. The expansion will alleviate traffic pressure on the Dulles Toll Road, Route 66, Route 7, and the Capital Beltway, in addition to raising property values throughout the area. It will also allow easier access to Dulles International Airport, Reston Town Center, and Tysons Corner hopefully continuing the economic expansion that has occurred in the past four or five years. The silver line is a perfect complement to a growing DC metro area and when it’s finished, taxpayers won’t be sorry.

  10. One possible alternative to the FDIC would be to insure the liquidity of the funds in a bank. Banks become illiquid when their assets are tied up in long-term investments. They still have the value of the money to pay to their investors, but are not able to pay it out right away. To fix this, the government could setup a repurchase agreement between all of the banks in the country. The Federal Reserve could buy the bank’s assets if they are illiquid. This allows the bank to pay its depositors without taking a loss. In this scenario, moral hazard is cut down because under the agreement, it must buy its assets back, so if the bank is taking risky investments, then it will lose money on the buyback if the investment is worthless. If the bank goes bankrupt, the federal reserve would buy its assets which would allow the bank to distribute money back to depositors. This solves the coordination failure problem between depositors and also gives depositors an incentive to monitor the bank in which they have savings.

  11. Throughout the world, there are certainly alternatives to the FDIC program in the U.S. There are many well-known schemes, including the European Union with its member states. Additionally, some countries do not currently have a formal deposit insurance scheme, such as China. According to the International Herald Tribune, the EU mandates that each of its member-states must insure a minimum amount of 50,000 euros per person, an increase from the pre-2008 standard of 20,000. One interesting case within the EU is Cyprus. Its central bank website ( indicates that while it insures depositors up to 100,000 euros, it excludes coverage for certain deposits, such as those by credit institutions, pension funds, insurance companies, and any deposits made by depositors under investigation for a role in a bank’s bankruptcy.
    However, deposit insurance isn’t always beneficial. A timeline of the events in the Icesave dispute (!date=2005-02-14_04:05:24!) provides an example of the risk of deposit insurance. Icesave was designed to protect depositors in the case of bank failure, but as Iceland’s 3 largest banks failed within a yearlong period, the funds were depleted too quickly to protect a substantial number of depositors. Half a million depositors had their accounts frozen, many of which were foreigners. The deposit fund’s inability to pay out insurance led to a diplomatic dispute, as British and Dutch citizens holding money in these banks were not reimbursed.
    With all of these alternatives in mind, it seems most advantageous to stick to the current system in place. Instituting a new program involves a lot of risk, as the Iceland example indicates. A form of the U.S. system has been in place since the 1930’s, and it has instilled confidence in depositors. Changing the current system would be too big a risk for too little a benefit.

  12. With respect to government provided health insurance, I believe the government is beginning to play a better role. The Affordable Care Act is the beginning of the transition into this role. With government-run health care, “free medical services would encourage patients to practice preventive medicine and inquire about problems early when treatment will be light; currently, patients often avoid physicals and other preventative measures because of the costs.” ( Some people criticize this legislation as unnecessary government intervention, but it’s exactly this type of action that is needed to fix the horrific problem of health care in the United States. If the government were to expand their role as health care provider, manager, and insurer, more money and effort could be spent on preventative medications and measures for public health, instead of treating preexisting conditions that were put off too long before treatment that, now, cost oppressively more to the patient (and these patients with preexisting conditions would actually have health care in this system, whereas many times these patients can be denied coverage or are subject to paying substantially more). Russell Turk states on that “Five of the costliest illnesses and conditions—cancer, cardiovascular disease, diabetes, lung disease, and strokes—can be prevented…yet only a fraction of every health care dollar goes to prevention or public health.” ( With businesses spending about $500 billion per year on employee health insurance, and local governments spending around $400 billion every year, the current system is an escalating disaster; even GOP members recognize that they “will be forced to offer a pragmatic alternative to the Affordable Care Act,” and soon. (

  13. A popular and controversial area in United States market policy is entitlement programs, such as Medicare and Social Security, which function to help balance the economy for citizens that are disadvantaged by situation. On April 5th, it was announced that President Obama will propose a new budget plan that cuts entitlement programs ( A cut on entitlement programs would be intended to reduce the government-spending deficit, a problem our government is being pushed to resolve. Yet, there are other consequences that could occur with entitlement cuts. Specifically, small business may be hit hard by this legislation, as presented by Mary Black, a UPS franchise owner. “During the summer of 2010, her 71-year-old husband fell ill with pneumonia and was hospitalized for more than four weeks, much of it in an intensive care unit. He recovered, but not before the medical bills soared to more than $130,000. ‘Had it not been for Medicare, my business would have gone under,’ Black said, noting that her business would have likely been the first thing sold to cover the expenses. ‘No question, I would have had to close the doors.’” ( With the ramifications of policy change in mind, the government cannot chose to remain idle either. Allowing the deficit to go unanswered, and contribute to the national debt would only serve to eventually weaken the economy in the end. I believe the best course of action would be to utilize our mixed economy in order to minimize the affects of both the deficit and lower entitlements.

  14. An example of a government action that is necessary is public broadcasting. Congress has previously tried to plan a budget that the GOP-run House Appropriations Committee would enable in order to defund public broadcasting. The money cutting the funding would only amount to small change. The article “Critic’s Notebook: the value of public broadcasting” estimated that an average of $1.35 a year would be saved and that you would never even notice. The main argument is that some critics feel that PBS or NPR never provide anything you would miss, however public broadcasting is supported largely by their consumers and will not be disappearing. The government should provide public radio because (based on public goods) it is non-rivalrous, meaning that the consumption of a the radio does not preclude consumption by another person. Effectively the cost of providing the radio to an extra user is zero which means that it also achieves allocative efficiency. The provision of a public good is the cause of a market failure if in a private sector not the government. Left to the free market public radio is under-provided or under-consumed which would lead to a loss of social welfare. This presents the strong case for the government rather than the market to provide and pay for radio. If funding is cut from providing radio then various types of entertainment will be curtailed. Our country’s founders knew that citizens in a democracy must have access to full information in order to make informed and enlightened political and policy decisions; thus why they put freedom of pres sin the First Amendment to the Constitution. If the radio were asymmetric/filtered through the offices of institutions concerned with making profits or grinding political axes, the free flow of unbiased information would seize to exist.

  15. With respect to the government health care associated entitlement programs such as Medicare and Medicaid, government’s role is necessary. The government’s main goal is to get health care for people who cannot afford it, foster new discoveries, regulate private market activities, etc. While there is a dispute about how much or how little government should oversee in our health care, the government only plays an indirect role, collecting taxes and providing money for private sectors. According to a journal article on the Health Affairs website, “Key Issues in Health Reform” by Susan Jaffe, the US government plays a vital role in providing direct care to veterans and government employees, as well as, spends about 30 billion dollars a year in advancing treatments and prevention for our health. Many people are also concerned about the increase in payments of health care/insurance for the future if it is still provided by the government. In the New York Time’s Article, “Obama Proposes $320 Billion in Medicare and Medicaid Cuts Over 10 Years” by Robert Pear, Obama proposed a cut in $248 billion from Medicare and $72 billion from Medicaid in the next 10 years. While this may seem beneficial in the long run, I think there would be more losses than gains from this proposal. According to this article, the Postal Service would end Saturday delivery, subsidies would be reduced, and there would be higher air fair and prescription drug fees. These proposed savings “represent less than three percent of what the government expects to spend on programs in the next ten years”. In addition, about 5% of the 48 million Medicare beneficiaries will pay even higher premiums and co-payments. Jacob J. Lew, director of the White House Office of Management and Budget expressed that, “there is a lot of pain, and it’s spread-it’s spread broadly and we think fairly”. Government should be able to play a role in our health care, but as far as cutting spending, this proposal would not benefit our future health care systems as much as it seems to project.

  16. It’s easy to think that America needs to change its health care system, having a mix of public and private doesn’t seem to be the most efficient idea. The cost for having private health care has risen making it harder to pay for. The percentage of uninsured Americans has risen from 16.8 in 2010 to 17.1 in 2012 according to Gallup polls. Another problem created is job places not providing health insurance for its workers. In 2010 45.8% of Americans had health insurance through their job, but in 2012 44.6% had them. It’s also easy to say that the government providing Obamacare would eliminate problems created by the mix of private and public health care. One country that practices a system similar to Obamacare is Canada. Canada is currently thought to have better health care since the life expectancy in Canada during 2012 was 81 years, beating America by 3 years (
    Canada faces problems like overcrowded hospitals, long waiting lists, and frequently canceled appointments. A health care program like this makes it harder for people to meet with specialists since everyone has access to them. However, statistics show that Canadians receive care for mental illnesses more frequently than Americans, and the U.S. has a much more prevalent rate of maternal death, according to The Los Angeles Times “there were 3.4 maternal deaths for every 100,000 births among Canadians, compared with 9.8 deaths per 100,000 ,(Americans” I think America’s problem is that our health care is divided between public and private health care. Canada’s system distributes health care more evenly than the U.S. and gets rid of the A-symmetric information problems America is currently facing but it would come with some sacrifices.

  17. I do believe that the government should play a role in solving particular problems of market failure. For instance, back in 2008 the company General Motors filed for bankruptcy to try and pay back their debt in an organized manner. However, at this same time, all major banks such as City Bank, were failing so they could not help out. If the government did not step in and bail out General Motors as well as these large banks, then the whole world would most likely collapsed. The problem had become so super-sized that government intervention was necessary to save the economy and the world for that matter. If they did not intervene than massive rebellions would have most likely occurred. On the other hand, there are many unintended consequences of too much government intervention. For example, currently, the government is still pumping 85 billion dollars monthly into the economy through quantitative easing; printing U.S. dollars which diminishes the worth. With this money they then purchase bonds; this whole process becomes in a way just like a patient on drugs. The government needs to begin waning off because soon the dollar will lose much value. Additionally, interest rates have become very low; this is good for people who take out loans because they don’t have to pay as much interest. For example, if someone were to take out a loan of 100,000 dollars the old interest rate would be about 6% per year which would equal 6,000 dollars. However since the interest rates have been lowered to about 4%, they save $2,000 per year. The unintended consequence of this is that the interest rates on bank deposits have been lowered as well. This affects all depositors; but it hurts senior citizens the most. This is because they are the ones with the bulk of the money in banks. If they have $100,000 in the banks, they are getting a quarter of 1% as a typical interest rate on a deposit which equates to $250 per year. The senior citizens do not have jobs, therefore the only income coming in is from Social Security and they too have to pay bills every month.

  18. In the current economy, a failure of the United States banking system would be devastating for both American businesses and individual citizens. Banks use the majority of the money brought in by depositors to invest and bring in profits. Often the only money that banks keep in reserves is the 10 percent required reserves that is mandated by the Federal Reserve. With the requirement at this level, a bank failure would cause major panic throughout the country. Even with the governments insurance on the majority of deposits, there may not be enough funds available to the government to cover the losses if a major failure was to occur. If people did not think their money was still going to be insured, a bank run could occur and even more panic would be caused in the nation. If this happens, their would not be much the government could do to prevent a bank run after bank failures have already started occurring. However, they could possible try to alleviate some of the damage by making changes before these failures become a reality. The Federal Reserve could increase the reserve ratio by a small percentage each year for a certain amount of years, to increase the amount that banks have to have on reserve. Increasing this ratio by even a small amount could decrease the amount of damage caused to a smaller degree.

  19. Adverse selection is when one party in a transaction takes advantage of knowing more information before the transaction happens. One of the biggest problems with adverse selection is with health insurance. In an article on New York Times by Ezekiel Emanuel he states that “if you pay an insurance company the same amount for all enrollees, it will want to avoid insuring sick people in order to save money.” Obviously, people who are likely to be sick or at risk are going to be the ones who want health insurance most. The question is how the government should play a role in this problem. Health insurance is never going to be perfect, but I believe the only way for it to exist is with the government. If we don’t have government provided insurance and if insurers were required to offer the same terms to anyone, regardless of medical history we would get caught in an “adverse selection death spiral” where healthy people would not buy insurance making it extremely expensive for the unhealthy. In an article on New York Times, Paul Krugman says “we already have government insurance for the most expensive clients, the elderly. Extending coverage to younger people requires some subsidies, but not on a scale that should prove especially difficult to pay for – and Obamacare does, in fact, pay for the expansion of coverage.” The problem with employee based insurance is that is it leaves out a large percentage of the population: the unemployed and the lower-wage workers who do not qualify for Medicaid and also do not have jobs that cannot provide health benefits. What we need is a universal health care that provides the same policy to everyone, where healthy people must have so they cannot back out leaving the unhealthy to pay, and subsidies so people with lower incomes can afford the same insurance.

  20. Although the role of government is a substantial component of the market system, they should not be involved in providing solutions to correct market failure. Asymmetric transaction is defined as a situation in which either the buyer or the seller has information that is unknown to the other party. As demonstrated in the class experiment, asymmetric transactions can lead to buyers purchasing products advertised as being “high quality” even though the seller sells a lower quality product than advertised. This can lead to a market failure in which buyers eventually reduce their demand for a particular product causing the demand curve to shift downwards, offsetting the current market equilibrium. As the demand for products decreases, there will be a surplus of resources which will be “wasted” essentially because the products are not being purchased. This is a prime example of a market failure. According to the Investopedia Financial Dictionary, the implementation of the minimum wage laws by the government results in market failure because companies are forced to hire above minimum wage workers leading to future market failure. This is one negative consequence of governments attempting to “correct” market failures. An article posted on The Atlantic entitled “Could Government Intervention Help Markets Function Better” by Charles Davi discusses real-life scenarios depicting situations in which a failure to “coordinate” results in market failures. A second, practical explanation of market failure illustrates companies that fail to coordinate are never better off in the long run, and when government intervention occurs, it can make the process of coordination even more difficult than it already was. Therefore, government intervention should remain minimal.

  21. In regards to health care, I believe that the U.S. government should play a larger role in providing access to individuals who would otherwise not be able to pay for private health insurance plans that may discriminate based on their respective state of health and as such pay significantly higher premiums for health service. I believe a more productive model would be to have a 2-tier system similar to many EU countries like Germany, France, and the UK, in which health care costs are covered mostly by a higher tax rate that would be able to cover the service in question, or more specifically like the French and Belgian model in which patients pay for their service and are later reimbursed partially. Concerning bank runs and regulation, I don’t believe there is an easy solution to making sure that depositors have total confidence, but I’m concerned about the future potential for worldwide bank runs due to the rise of value of Bitcoins, a form of electronic currency that isn’t regulated by governmental organizations. As a result, the current trend towards further investment in Bitcoins may either prove to be more devastating for countries are experiencing crisises like Cyprus or Spain, and that could devaluate the Euro and currencies pegged to it in the process.

  22. I am neutral on the belief that the government plays a proper role in the topic of provided health insurance; I believe that they are all over every part of the health care industry as well as the insurance involved in it and need to not be so involved, but I also believe that without the government being involved that it would be chaos. The government is currently running health care programs such as Medicaid, Medicare, and Obamacare. Most of these programs provide health insurance and medical treatment for those who cannot afford it. However, there are many restrictions on the plans, with extra fees for being over a certain weight limit, and can be extremely difficult to apply for. An article by the Huffington Post stated that “applying for Obamacare may be as difficult as doing taxes and enormously time consuming”. ( There was recently an article in the Washington Post that discussed the Affordable Care Act. This article discusses how it is supposed to provide better care for America by giving “people who can’t get what they need from their Prescription Drug or Medicare Advantage plan.” ( It is supposed to help federal insurance regulations, for example, banning certain individuals from applying based on already pre-existing conditions. The Affordable Care Act would include multiple provisions to Medicaid, such as the expansion of citizen’s eligibility. I believe that this act will only be useful to the poorer people and will still be unsatisfactory for many Americans, as the government can never be able to provide a perfect health care plan to suit everyone’s needs. I also believe that there will be certain restrictions that the government is not letting the public be privy to. This is another form of asymmetric information, conning individuals into purchasing what they believe will help them they most, even if it does not.

  23. Often when a market is failing, government intervention is almost expected. However, government intervention typically does not solve the problem in many cases when they do intervene they actually creates more problems. Government programs and legislation many times lead to a less efficient market, such as rent control. Rent control creates a shortage of rentable apartments because the demand for apartments at that price is greater than what landlords are willing to supply. When the government intervenes, politicians often do things that make them look good in the public opinion not necessarily in the interest of the market. Instead of the government jumping into the market, I think the market should be allowed to fix itself. If a firm is not efficient enough, they should fail and be replaced with a more efficient, competitive firm. This non-action will cause some people to lose their jobs which is unfortunate for them but as a whole the country and economy will be better off.

  24. Government intervention when it comes to market failure can be an extremely valuable thing. In the case of the 2008 government bailout of General Motors and Chrysler, federal intervention was able to save the company by loaning government dollars to help fund the companies until they were able to come back onto their feet in 2012. However, this one case isn’t enough to justify the necessity of government intervention in most cases of market failure.
    Competition and reputation have enough power and influence to control asymmetric information from misleading buyers. In cases such as these, failure is often necessary and can lead to positive outcomes in the market. For example, in the past four years, there were hundreds of companies that experienced failure due to the recession. The fact that Barnes and Noble, Best Buy and Little Debbie are still in business when their competitors, Borders, Circuit City and Hostess, are no longer alive just proves that market failure can oftentimes be beneficial and can produce a stronger market. With competition and reputation to ensure the quality of goods, government intervention is hardly necessary when it comes to market failure.

    GM and Chrysler info:

    Government Intervention Info:

  25. I don’t believe the government is playing the proper role under the Affordable Care Act (ACA or “Obamacare”). The goal of the ACA is to increase access to health care for more than 38 million Americans who currently lack health insurance. Supporters state that quality will improve because more Americans will be paying for insurance and costs will go down as volume increases. I read an article ( establishing that 3 components of health care are closely related to each other – access, cost and quality. If one or two of these components are changed, it impacts the other components. The government is increasing access by forcing everyone to have insurance to pay a penalty. Most adverse risks, or people with medical problems, will now be eligible for health insurance driving up costs. The ACA also requires doctors and hospitals to agree to lower reimbursements and higher volumes of patients, which might lead to a decrease in doctors and lower quality and availability of care. The government will also allow people with incomes below a certain level to receive highly subsidized premiums which will increase the cost of care to those with higher incomes. According to one estimate, premiums for some Americans in 2014 may rise from 20 to 100% ( When government mandates all people must be insured, mandates coverage and mandates certain people must be given subsidies or free health coverage, costs will rise and quality will go down. In addition, the bureaucratic cost will rise to 50% of total US healthcare spending.( This will make the healthcare system even more inefficient and the ACA “less affordable” to those who need healthcare.

  26. Asymmetric information can lead to a lot of unhappy and unsatisfied customers because in many cases they are left with a low quality good even when they paid top dollar. This very scenario can happen even when purchasing services and it is possible to overpay for for a service, for example, a nursing home for an elderly relative who does not quite need everything the nursing hoe has to offer yet. There are many different types of nursing homes from privately own to non-profit ones. Recently though, the government has taken action and created a new Medicare funded program, called PACE, that functions almost in the same way as a nursing home but in a day format instead of overnight. This program cuts down costs in the way that now patients who do not need unnecessary overnight care will still be attended to during the day. Also because this program is government funded more people now have access to it verses being unable to pay for the expensive long term stay at a nursing home. In this way I believe that the government is right to step in because PACE will not be competitive for people to enter and everyone will have a fairer shot at receiving care because all costs for this day program are covered under Medicare.

    PACE Info;

  27. I do not believe the government should play a role in rescuing businesses when market failure occurs. While there are many consequences of non-action, such as job loss, economic downturns, a slowdown in the growth of GDP, and many angry citizens; when the government interferes it does so often in a messy way and on its own behalf, and not on the behalf of the population. In an article by Art Carden and Steve Horwitz, they write, “Politicians’ self-interest, combined with the limits to their knowledge, mean that they likely will not and cannot produce the ideal outcome. We are left to ponder which of two imperfect systems will serve us better: the “failed” market or the “failed” political process” (Is Market Failure…). Sometimes it is better to let the market failure, namely using creative destruction. In such cases, either entrepreneurs will save the market or the business(s) will fail and a new market will arise. Coming from Michigan, I feel comfortable using the “Big Three Bailout” as an example. While many jobs were saved, government intervention has only allowed each company to continue on the path they were before, and has reduced potentially pertinent innovation and change. Their business structures have remained similar to before with many top leaders still making far more money than the companies can afford. As previously stated, had the companies needed to change to survive, entrepreneurs could have helped solve the problem or the companies would have failed, allowing Michigan to realize a new area of specialization.

  28. The government should not be helping in the market failures of companies around the country. When businesses begin failing, it’s a method of natural selection. If the company fails to adapt to the changing ways of the market, they should no longer be able to exist within our economy. When companies feel the pressure of possible failure, they generally work harder to avoid bankruptcy by introducing new products, services, or promotional deals. If the government is there to bail out every company that fails, whether it is a bank or a car manufacturer, there will never be change or innovation within the system. As discussed in class today, as well as in this article ( ), GDP growth does not stem from government run programs, rather it increases from technology and innovation. Investors would not want to place money and trust within a company with bad management of funds or in a company that needed help, because it shows no initiative for the future of the company. In the case that a company must absolutely be bailed out, in circumstances that would hurt thousands of jobs, the company must then come back strong, showing a balanced budget of allocated funding and how certain excessive expenditures have been cut to allow growth of new necessary expenses. Being given money from the government would make that business a government-run entity, meaning people should not be paid more than a government employee salary. The main goal, though, would be instilling investor confidence in the newly run company to advance it further into a debt-free age.

  29. One example of a government action that was unnecessary is part of the Leesburg Virginia Lowenbach street improvements project ( As part of this project, in 2007 the Leesburg Town Council hired, with tax payer’s money, the Whitman Requardt & Associates, LLP to build 2 traffic circles around two intersections on the road I live on. These traffic circles were designed to “serve as traffic calming measures by forcing drivers to slow to a speed that allows them to comfortably maneuver around each circle” (, however all it does is cause confusion as to who is supposed to go and close calls as people speed 25-30 mph over the circles speed limits. This is a public good, a good that is both non-excludable and non-rivalrous, that is not needed, is more of a nuisance than a benefit, and is a waste of tax payers money. This traffic installment was a market failure. They could have very easily just left the intersection as is and installed a few speed bumps before the intersection in order to promote the same action but with less intersection confusion.

    Leesburg Gov Website

  30. The U.S. economy is not a one hundred percent free economy. The government intervenes with the free market in many different fields. In regards to the recession of 2007-2009, many major financial institutions were in serious danger of going out of business. At this point in time the government stepped in and “saved” the banks. They did so by purchasing over 115 billion dollars worth of preferred stock in the big banks, and lent out 350 billion overall according to economist Kimberly Amadeo. ( At the time fear swept the nation, and even money market funds saw their highest withdrawals in history. This bailout was required to provide stability once again in the markets and economy, while instilling faith in banks by society. Many Americans were upset with the governments decision to do so. While individuals lost jobs, small businesses were ran into the ground, and smaller banks went bankrupt without any aid from the government, the missteps of giant corporations were being helped by the government. However, this intervention was completely necessary. Letting one or two of the big banks fail would have resulted in a complete crash of the United States financial system. These banks are very intricately intertwined in a way that would result in the majority of them going down if just one had. This would have resulted in absolute chaos across the nation. Although this does not encourage banks to learn from their mistakes in the future it was necessary. However, this does not mean that all big businesses should be bailed out by the government for their mistakes in the future. These bailouts are widely believed to have proven to be successful. The big banks that the economy depends on survived, while the majority of the TARP payments have been repaid to the government. Many economists agree that a second great depression was narrowly avoided when the government put forth this plan.

  31. While sometimes too much government interaction is a bad thing when regards to a controversial issue, government interaction to fixing market failures has been helpful over time. The market, while private, can still be dictated by the government and in this post I will outline times when it has proved worthy. The market is a dog eat dog world and not all companies will be successful. There are times, however, when the interaction and buyouts provided by the government are critical for the success of the company but also America. One, for example, was the bailout of AIG in 2008. AIG, a huge insurance company, had 79.9% of the companies equity owned by the government for an $85 billion loan. This resulted in AIG doing away with business that wasn’t profitable but at the same time it shows the weakness that a company that big could face. In class we talked about the buyout of Bear Stearnes and also learned about the 2008 bank rescue by the government. Another famous bailout was that of Fannie Mae and Freddie Mac when the government spent $200 billion to save them. This was a classic case of issuing loans that defaulted and the government, with our tax money, had to bail them out. That is one of the problem with the bailouts and fixing failures: that the government is spending tremendous amounts of money on this. However, while the public will complain about how much is spent to bail out “too large to fail” companies, it all comes down to how small of a percentage that is really of our budget and national debt. With the increasing debt, however, it will be much harder for government to continue to bail out companies and more will fail through poor management and decision.


  32. Roadway maintenance costs are extremely high in America. According to, local governments in the Sacramento region spend $250 million per year to maintain, repair, rehabilitate and reconstruct the region’s 10,000 miles of local roads, streets, bridges and sidewalks. That is just part of the state! However, they said that to keep these roads in a “good” condition, an estimated additional $100 million would need to be spent. Their plan, the MTP 2035, proposes a solution to this shortage of federal funding for road maintenance and argues that proper repairs to the deteriorating roads is imperative for the transportation system.

    The government should allot enough money for the proper care of these roads. It is in the best interest of drivers and the public good that we have safe roads on which to travel. Some people, however, support the privatization of the roads. In his book, The Privatization of Roads and Highways, Walter Block claims that by privatizing the roads we would save lives, curtail pollution, save money, save time, introduce accountability, and make transportation a pleasure instead of drudgery. His claims, though, have very little support or evidence so it is uncertain if they would actually occur with privatization. Road maintenance is certainly an expensive undertaking and, therefore, could only be organized by a very large company or business. It would be better to simply keep the government accountable for these upkeep costs considering that it is so costly and technically a public concern rather than a private one.

  33. In a free market economic system, scarce resources are allocated through the price mechanism, where the preferences and spending decisions of consumers and the supply decisions of businesses come together to determine equilibrium prices. However, there are times when it is necessary for the government to intervene in the price mechanism in the hopes of changing the allocation of resources and achieve what they perceive to be an improvement in economic and social welfare. The three main reasons for government intervention are: 1) to correct market failure 2) to achieve a more equitable distribution of income and wealth 3) to improve performance of the economy. In November of 2008, General Motors turned to the federal government for a bailout loan as the final alternative to bankruptcy
    ( If the government opted not to intervene, the entire auto industry could have collapsed, having negative implications for our economy as a whole. One important point to bear in mind is that the effects of different forms of government intervention in markets are inherently not neutral – financial support given by the government to one set of producers rather than another will always create “winners and losers” ( Taxing one product more than another will similarly have different effects on different groups of consumers. Government intervention does not always work in the way in which it was intended or the way in which economic theory predicts it should. Part of the fascination of studying Economics is that the “law of unintended consequences” often comes into play – events can affect a particular policy, and consumers and businesses rarely behave precisely in the way in which the government might want! We will consider this in more detail when we consider government failure.
    In order to judge the effects of intervention it is necessary to take into account the efficiency of a policy, effectiveness of a policy, equity effects of intervention, and sustainability of the policy. (

  34. Something as simple as a tax or an economic bailout is considered to be “helping to solve market failure,” so in that sense the government absolutely should play a role in helping to correct the market. In some cases when businesses fail as a result of the market, this is more of an organic process and these businesses should be allowed to die. But in cases such as the bailout of GM and Chrysler, the government spending money to resuscitate those two companies indirectly helped to save the entire American auto industry. For example, the president of Ford said that “Ford would have closed because it wouldn’t have been able to get parts, because the parts industry in this country was in arguably worse shape than the assemblers.” There were multiple facets of the auto industry that were aided by this one government intervention in the form of a bailout. It’s instances like these when the government needs to play a role in correcting the market – when a company’s failure affects, to some degree, its entire industry. An obvious downside of bailouts such as these is that the huge sums of money eventually fall to the taxpayers; in the case of the auto industry bailout, $25 billion. Ultimately, it’s up to the taxpayers to decide whether such government action is worthwhile because they are the ones who vote in the politicians that approve and pursue the government’s market interventions.

  35. One government action that is necessary here in the United States is State government funding for public universities and colleges. Both public and private universities are available for all American’s to gain a higher education. So why do public universities exist in the first place? According to, States generally charge higher tuition to out-of-state students. The higher fees are based on the theory that students and their parents from the state, have contributed to subsidizing the university by paying state taxes, while of out-of-state students and their parents have not. This allows for more students to be able to pay for college. So the benefit of receiving a higher education will eventually outweigh the cost after graduation and entering the work force. So why do schools like James Madison University exists when there is a private market for schools like Northwestern and Princeton? According to Peterson’s college bound website ( Private schools are privately owned and funded for and may offer more specific education tracks than public colleges do. But for many American’s the cost/benefit analysis might not be as great to spend more money to attend those schools. I think it is necessary for the State and Federal government to play a role in funding for higher education because they are indirectly investing in America’s future. (Forbes) Even though a private market does exist for higher education, if the government stopped it’s funding it will reduce the number of students who will be able to be successful in life and have enough income to support their standard of living by a large percentage.

    Amy Goffe

  36. I do not believe that the government should be involved in bailing out businesses in case of a market failure. Businesses failing is part of the business cycle, and when a business fails, it leaves an opening for a new business to take it’s place. If the government tried to save every failing industry, it will hold back our nation from growing and finding new innovations for businesses. While it may be hard for people to accept the idea of allowing American jobs to disappear, it is important for the big picture to let businesses fail. In order for there to be economic change and growth, new businesses must develop to meet the changing demand of the American people.
    The consequence of non-action by the government is that some businesses will fail, and some jobs will be lost. The benefit of non-action is that new businesses will be created, leading to new jobs to replace the lost ones. All this change is a part of the business cycle, and is necessary to our economy changing as the world morphs.

  37. With Americas excess budget spending and increasing deficit, clearing our 16 trillion in debts seems unfathomable. However, we have begun to take a step in the right direction towards balancing the budget. On Tuesday, the Navy announced they were canceling all the airshows the Blue Angels had scheduled for the rest of the year. With the blue angels being such an iconic American symbol I feel this action was very necessary as it sent a message to Americans letting citizens know that the budget is a major priority. According to CNN, the Navy, Air force and the rest of the federal government will deal with 85 billion in cuts for the next fiscal year. The government will no longer be funding the blue angels but a private market could very easily back them if they were willing to cough up 100,000 per show. At a rate of over 35 shows per year, its safe to say this budget cut was justifiable.

  38. The government plays too big of a role in the free market. The government often interferes with the private sector, ultimately resulting in a significant loss to American taxpayers. The infamous auto industry bailout is a prime example of unnecessary government involvement. These corporations were responsible for their own bankruptcy by not operating competitively with the global market. For example, instead of developing high demand products such as alternative energy vehicles, these industries attempted to gain large profits from SUV’s and Hummers.
    In addition to bailout money, Obama, a strong proponent of “tax fairness”, gave one of America’s biggest corporate giants, General Motors, a multi-billion dollar tax break. In 2011, GM paid nothing in federal income taxes despite Obama’s claim that they earned the highest profits in the company’s 100-year history. Fortunately, the government is currently selling its shares of GM, slowly putting an end to the government’s control over a private company. However, the fact that GM failed to pay back all the taxpayer money used in 2009 will certainly still taint the company.
    As stated in the Washington Post article “President Obama’s phony accounting on the auto industry bailout,” Obama tries to justify his actions by claiming that the bailout saved the country from a depression. In reality, no one knows what would have happened if the government didn’t bailout these private industries. If GM’s filing for Chapter 11 protection did indeed get turned down, the company would have been forced to work out of bankruptcy on their own, perhaps resulting in an even stronger and smarter company. In the case of Ford Motor Company, they declined to receive any bailout money and are currently operating successfully. By changing their business strategy and relying more on innovation and marketing, Ford has overcome bankruptcy and gained the respect of American consumers.
    Overall, it is not the government’s role to bail businesses out when they are failing. Instead, it is up to the executives of the industries to rethink business strategies and focus on new concepts that will appeal to consumers.

  39. With respect to the government mandated Health Care, I too believe that the government should do more to protect its citizens. Having to pay several hundred-dollar premiums just for walking in the emergency room door is a bit excessive. But on the other hand, those people looking for that basic care should not have to right to sue the hospital for malpractice with the exception of particularly bad cases. One example may be, if a child dies simply because a doctor gave a child medication which they were allergic to and that allergy was clearly defined on the persons file. But besides examples such as that, if a hospital is treating you the same as the person next to you who may be putting twice as much into the system then a little trust and respect needs to be given.
    Although, I do believe that all citizens under the age of 19 should have access to healthcare. For example, The Children’s Health Insurance Program (CHIP) provides free to low-cost health coverage to more than 7 million children up to the age of 19. While I think all children should be covered, CHIP generally provides for families with incomes up to $44,100 per year, for a family of four. The specifics vary by state but all states cover routine check-ups, immunizations, hospital care, dental care, and lab and x-ray services. Children also receive free preventative care, but low premiums may be required for additional services. If we are the greatest country in the world then all our future leaders of tomorrow should be taken care of. It is also important to note that these children’s health records would not be disclosed to any future healthcare providers. Beyond that age I believe a mixture of private and government care should compete for insurers. I believe complete government mandated care would never be the best system to take care of the principle agent problem for the same reason cafeteria food in public schools is never the best quality. Without competition the provider’s services will continue to drop in quality until only the bare minimum is provided. After all, what is the incentive to be the best if everyone is always treated the same.

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