Telemedicine in Asteria

Read the extracts and answer the questions that follow.

Text A — Quality uncertainty

1. Asteria’s online medical-consultation market has expanded rapidly. Clinics know more than patients about doctors’ qualifications and diagnostic accuracy. This asymmetric information makes it difficult for patients to distinguish reliable clinics from unreliable clinics before purchasing a consultation.

2. Patients therefore base their willingness to pay on expected average quality. Several reliable clinics claim that the resulting price is too low to cover the cost of employing qualified doctors. Some have left the market, while low-quality clinics remain.

Text B — Proposed responses

1. The government is considering compulsory licensing, verified publication of diagnostic-accuracy rates and penalties for misleading claims. Reliable clinics may also offer follow-up guarantees as a private signal of quality.

2. Regulation would require public expenditure on inspections and could increase clinics’ costs. Small clinics argue that strict requirements may reduce competition and access in rural areas.

Table 1 — Consultations offered each month

Monthly telemedicine consultations offered by clinic type before and after average-quality pricing.

Table 2 — Prices and expenditure

Observed average consultation prices and government inspection expenditure before and after licensing; the data show association by period, not causation.

Rental housing in Brinland

Read the extracts and answer the questions that follow.

Text A — Hidden property quality

1. Landlords know more than prospective tenants about damp, insulation and recurring maintenance problems. Tenants usually discover these defects only after signing a lease. This may cause adverse selection, because tenants cannot distinguish well-maintained apartments from poor-quality apartments in advance.

2. Landlords of high-quality apartments may reject the rent tenants are willing to pay for an apartment of uncertain quality. Poor-quality apartments then form a larger proportion of the rental market.

Text B — Policy options

1. Brinland is considering mandatory inspection certificates and a public register of complaints. Tenant associations support these measures, while landlords argue that inspection fees will be added to rents.

2. Some landlords voluntarily offer comprehensive maintenance guarantees. The government is also considering minimum habitability standards, but enforcement would require additional inspectors.

Table 1 — Apartment listings

Apartment listings before and after increased quality uncertainty.

Table 2 — Inspection programme

Annual rental costs under the proposed inspection programme.

Pet insurance in Elvaria

Read the extracts and answer the questions that follow.

Text A — Changes after insurance

1. Insurers cannot continuously observe how carefully owners supervise their pets. After purchasing comprehensive insurance, some owners use fewer preventive treatments and visit expensive emergency clinics more frequently because the insurer pays most treatment costs.

2. This moral hazard raises claims above the level expected when premiums were set. Insurers respond by increasing premiums for all customers, including careful owners.

Text B — Contract design

1. Insurers propose deductibles, co-payments and insurance-premium discounts for verified preventive care. They may also require electronic health records from veterinarians.

2. Consumer groups argue that high cost-sharing may cause low-income owners to delay necessary treatment. Government regulation could require clear disclosure of exclusions and minimum coverage.

Table 1 — Annual claims

Annual claims for insured pets before and after comprehensive cover.

Table 2 — Proposed deductible

Proposed annual deductible arrangement for pet insurance claims.

Childcare services in Faron

Read the extracts and answer the questions that follow.

Text A — Unobservable quality

1. Parents cannot fully observe staff training, supervision and safety practices before enrolling a child. Providers know more about service quality. Parents therefore offer fees based on average expected quality, and some high-quality providers leave the market.

2. The government identifies asymmetric information as a cause of underprovision of trustworthy childcare. Poor care may also harm children after contracts are signed if providers reduce staffing when inspections are infrequent.

Text B — Quality assurance

1. Faron proposes staff-qualification rules, unannounced inspections and a public register of provider inspection scores. Providers may additionally signal quality through independently verified low child-to-staff ratios.

2. More intensive regulation could increase fees and reduce places, particularly in low-income districts. Parents may also incorrectly assume that every licensed provider has identical quality.

Table 1 — Licensed childcare places

Licensed childcare places before and after increased quality uncertainty.

Table 2 — Inspection budget

Annual inspection requirements and cost in Faron.

Artificial-intelligence recruitment in Hespera

Read the extracts and answer the questions that follow.

Text A — Hidden system quality

1. Employers purchasing recruitment software cannot directly observe the accuracy or bias of each algorithm. Software developers know more about the data and testing used. Employers may therefore avoid high-quality systems because they cannot distinguish them from unreliable systems.

2. Applicants also know more than employers about their effort and some skills. Employers use tests and references as screening devices, although inaccurate screening may reject productive workers.

Text B — Audits and guarantees

1. Hespera proposes independent algorithm audits, standardized accuracy reports and legal responsibility for false performance claims. Developers may also offer outcome-based guarantees.

2. Audits may reveal useful information, but testing is costly and results can become outdated when algorithms change. Strict rules may discourage new software firms from entering.

Table 1 — Software licences

Annual sales of high-accuracy recruitment-software licences before and after employer distrust.

Table 2 — Audit programme

Audit programme results for recruitment software systems in Hespera.

Home-renovation contractors in Ilyria

Read the extracts and answer the questions that follow.

Text A — Contractor quality

1. Contractors know more than homeowners about workmanship, materials and the likelihood that a project will be completed on time. Homeowners usually discover defects after making a substantial payment.

2. High-quality contractors offer detailed warranties, but unreliable firms may imitate these promises while expecting to close before claims are made. Weak enforcement therefore reduces the credibility of signalling.

Text B — Consumer protection

1. Ilyria proposes compulsory licensing, escrow accounts for customer payments and a public register of verified complaints. Insurers also sell completion bonds after screening contractors.

2. Licensing and bonds may increase costs. However, consumer groups argue that stronger enforcement would restore trust and increase the number of renovations undertaken.

Table 1 — Renovation contracts

Annual renovation contracts before and after reports of unfinished projects.

Table 2 — Licensing programme

Licensing programme data for renovation contractors in Ilyria.

Crop seeds in Kintaba

Read the extracts and answer the questions that follow.

Text A — Seed quality

1. Seed suppliers know more than farmers about germination rates, disease resistance and whether seed has been stored correctly. Farmers cannot verify these characteristics before planting.

2. Farmers therefore pay a price reflecting average expected quality. Producers of reliable seed may leave the market, while poor seed remains. This causes adverse selection and may reduce agricultural productivity.

Text B — Labels and testing

1. Kintaba proposes compulsory germination labels, random laboratory tests and refunds for seed that fails stated standards. Farmer cooperatives also test sample batches before negotiating bulk purchases.

2. Testing may improve information but delay planting and increase seed prices. Remote farmers may have limited access to laboratories or certified suppliers.

Table 1 — Seed packets sold

Seed-packet sales before and after increased quality uncertainty.

Table 2 — Testing programme

Laboratory testing programme for seed batches in Kintaba.

Refurbished smartphones in Lydora

Online sellers know more than buyers about the quality of refurbished smartphones. Buyers cannot verify whether internal components have been replaced correctly before purchase. Table 1 shows information about the market.

Market data for 1,000 refurbished smartphones in Lydora.

The government is considering compulsory inspections. Each inspection would cost 18 currency units (CU). An inspection would identify 80% of defective phones before sale. A defective phone mistakenly sold as reliable imposes a loss of 300 CU on its buyer. Assume that, without inspections, all 400 defective phones would be sold as reliable, that any defective phone identified by inspection is prevented from being advertised or sold as reliable, and that the 300 CU loss is a real social loss avoided by inspection.

Some sellers instead offer a comprehensive warranty covering a repair costing 180 CU. The probability of a warranty claim is 5% for a reliable phone and 35% for a defective phone.

Health insurance in Norland

A private health insurer cannot directly observe each applicant's health risk. Table 1 shows information about 10 000 potential policyholders.

Potential health-insurance applicants and expected annual major claims after comprehensive insurance by risk group.

Table 1 reports expected annual claims after comprehensive insurance is provided. Use these figures, without adding the separate minor-treatment figures below, when calculating the premium in part (a)(ii); the minor-treatment figures may be used in part (a)(iv) and part (b) to assess moral hazard.

The insurer charges the same premium to every applicant and incurs an administration cost of 300 currency units (CU) per policy. Low-risk applicants will pay no more than 1200 CU for insurance.

After comprehensive insurance is provided, the average number of minor-treatment claims rises from 0.40 to 0.55 per policy each year. Each minor-treatment claim costs the insurer 200 CU. The insurer is considering a 500 CU deductible for major claims. Without a deductible, a representative policyholder has a 30% probability of making a 4000 CU major claim. With the deductible, the probability is expected to fall to 24%.

Online business lending in Calidia

An online lender offers one-year loans of 10 000 currency units (CU) to small businesses. Applicants know more than the lender about the risk of their projects. Table 1 shows the applicant pool.

Applicant numbers and default probabilities by risk group

If a borrower repays, the lender receives interest revenue of 1000 CU. If a borrower defaults, the lender loses 6000 CU after recovering the remaining assets. At an interest charge of 1000 CU, all groups apply. If the interest charge rises to 1200 CU, all low-risk applicants withdraw while medium-risk and high-risk applicants remain.

After receiving a loan, each of the 200 medium-risk borrowers may choose a riskier project. This raises the default probability from 8% to 14%. The lender cannot observe the project choice before losses occur.

Green-investment funds in Darsenia

Read the extracts and answer the questions that follow.

Text A — Hidden investment risk

1. Fund managers know more than households about the assets held by “green” investment funds. Some funds use environmental claims while holding risky or environmentally damaging assets. Investors cannot easily verify either the environmental quality or financial risk before investing.

2. Safer, genuinely green funds face competition from funds making unsupported claims. This may produce adverse selection if trustworthy funds cannot obtain a price that reflects their quality.

Text B — Disclosure and certification

1. Darsenia proposes standardized risk reports, audited environmental disclosures and legal penalties for false claims. Independent certification firms also offer a voluntary quality mark.

2. Auditing is costly, and small funds argue that compulsory reports could create barriers to entry. Consumer groups warn that certification is ineffective if the certifier is paid by the fund and lacks independence.

Table 1 — Household investment

Household investment in genuinely green funds before and after misleading environmental claims became widespread.

Table 2 — Certification data

Certification applications and audit outcomes in Darsenia.

Voluntary carbon offsets in Galenia

Read the extracts and answer the questions that follow.

Text A — Project credibility

1. Offset developers know more than buyers about whether projects produce genuine, additional and lasting reductions in emissions. Buyers may pay for credits that would have been created even without their payment.

2. Because buyers cannot verify project quality, they offer a price based on average expected effectiveness. High-integrity developers may withdraw. This pre-transaction problem is described as adverse selection.

Text B — Monitoring and certification

1. Galenia proposes a public registry, standardized measurement rules and random verification. Private certifiers already award quality labels, but some are funded by project developers.

2. Stronger monitoring may improve trust, yet verification is expensive and technically uncertain. Very strict rules could exclude small community forestry projects.

Table 1 — Offset credits supplied

Offset credits supplied before and after buyer distrust.

Table 2 — Verification programme

Annual outcomes of Galenia's verification programme.

Fertility clinics in Jandora

Read the extracts and answer the questions that follow.

Text A — Treatment outcomes

1. Clinics know more than patients about laboratory quality, staff experience and how they calculate reported success rates. Some clinics exclude difficult cases from published statistics, making comparisons misleading.

2. Patients may choose expensive treatment based on incomplete information. High-quality clinics support standardized reporting, while others argue that outcomes depend on patient characteristics and cannot be summarized by one measure.

Text B — Behaviour after payment

1. Once patients have prepaid for a treatment package, a clinic may reduce consultation time or use less costly procedures if quality is difficult to monitor. This is a possible moral hazard problem.

2. The government of Jandora proposes audited success-rate reporting, minimum laboratory standards and refunds when specified services are not delivered. Clinics may signal quality through accreditation.

Table 1 — Treatment cycles

Annual fertility-treatment cycles before and after concerns about reported success rates.

Table 2 — Reporting audit

Reporting audit of fertility clinics in Jandora

Adventure-tour packages in Lumeria

Read the extracts and answer the questions that follow.

Text A — Safety information

1. Tour operators know more than travellers about guide training, equipment maintenance and emergency procedures. Travellers often cannot verify safety before purchasing a package.

2. After receiving full payment, some operators may reduce guide numbers or postpone equipment replacement because these actions are difficult for customers to observe. This hidden-action problem is moral hazard.

Text B — Public and private responses

1. Lumeria proposes compulsory safety licences, disclosure of accident rates and random inspections. Operators may also obtain independent certification and offer money-back safety guarantees.

2. Operators argue that strict licensing will raise prices and reduce tourism employment. Consumer organizations respond that serious accidents damage confidence in the entire industry.

Table 1 — Tour-package sales

Annual adventure-tour package sales before and after reported accidents.

Table 2 — Safety inspections

Safety inspections of adventure-tour operators in Lumeria.

Cybersecurity insurance in Estovia

Insurers in Estovia cannot perfectly observe firms' cybersecurity systems or employees' behaviour. Table 1 shows the composition of an insurer's portfolio before insurance changes firms' incentives.

Estovia cybersecurity insurance portfolio before insurance changes firms’ behaviour.

Each successful cyberattack causes an insured loss of $100\,000\ \text{CU}$.

After firms receive full insurance, breach probabilities rise to $9\%$ for low-risk firms and $28\%$ for high-risk firms. A proposed contract would require firms to bear $20\%$ of each loss. Under this contract, breach probabilities are forecast to be $7\%$ and $23\%$, respectively.

Alternatively, the insurer could monitor every firm at a cost of $1\,500\ \text{CU}$ per firm. Monitoring is expected to reduce breach probabilities to $6\%$ for low-risk firms and $21\%$ for high-risk firms.

Private vocational courses in Montara

Training providers know more than students about course quality and likely employment outcomes. Students cannot verify teaching quality before enrolling. Table 1 shows information about 1000 available course places.

Market data for 1000 vocational-course places by course quality, including certification outcomes.

Assume that the minimum tuition fee equals the resource cost of providing a place, and that tuition payments are transfers rather than additional social benefits. Certification would cost 250 CU per place inspected, with an additional fixed administration cost of 180 000 CU. All 1000 available places will be inspected.

The government also provides tuition guarantees that pay providers in full when students withdraw. Following the introduction of full guarantees, some providers reduce teaching hours because the government cannot continuously observe their effort.