Kevin Pine
Eco310
Professor Ambrose
Test 2

1A. Market failure is a situation in which the allocation of goods and services is not efficient. In any given market, the quantity of a product demanded by consumers does not equate to the quantity supplied by suppliers. This is a direct result of a lack of certain economically ideal factors, which prevents equilibrium.
Some major reasons that a free, unregulated market in medical care might night be optimal are: Imperfect information, asymmetric information, barriers to entry, and third-party payers. * Imperfect information is a major reason because in medical markets, patients are not fully informed about virtually every aspect of the medical transaction. These patients are forced to rely on their physicians to form a learned opinion on their illness, their diagnosis, and their prescribed treatment. In addition, patients are often confronted with the problem of little to no knowledge at all about prices and the quality differences among alternative providers. This lack of knowledge gives rise to asymmetric information, which leads to two important market defects. First, patients are not able to judge price and quality differences among providers. As a result, providers charge prices that are above the prevailing market prices for a given level of quality. Second, the agency problem, which arises when the physician serves as the patient’s agent, thereby leading the patient to delegate most of the decision-making authority to the physician. * Barriers to entry in competitive markets are characterized by easy entry and exit of suppliers. Profits serve as the inducer for prospective providers. Limited competition leads to market power, which in turn leads to market failure. * Third-party payers is another reason because inefficiencies arise as a result of consumers not spending their own money. The