Market Failure

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Preparation

To prepare to complete this week's discussion, review the following resources on risk vs. uncertainty:

• Crypto-Assets: Implications for Consumers, Investors, and BusinessesLinks to an external site.
• Decision Making Under Uncertainty.
• Corporate Decision-Making: Is Hindsight 20/20?Links to an external site. [Video]

Your instructor may also post additional resources to help further explain concepts related to this week's discussion.

Context

You will need to understand Asymmetric information and Imperfect information to complete the discussion.

• Asymmetric information is where one party in the transaction has more information than the other party in the transaction.
• Imperfect information is a situation in which neither party has perfect information about the good/service being exchanged in a transaction. Such goods and services are sometimes referred to as "experience goods."

Asymmetric information and/or imperfect information can cause two forms of market failure:

• Adverse selection, or
• Moral hazard.

Post a Response

Wherever there is a market failure there are entrepreneurial opportunities. A long-standing problem in the used car market was the sellers of used cars had better information about the cars than the buyers of the cars. This asymmetric information problem dubbed the market for lemons, set off something of a revolution. One solution to the 'lemon problem' is to improve information. Today buyers of used cars can quickly access information about used cars via such systems as Carfax.

In 2021 a group of experts began investigating how to hack into a Bitcoin wallet for which the owner had lost the password. In the process, they discovered that it was possible to crack into about $1 billion worth of accounts. Wallets set up before 2016 were vulnerable because of flawed open-source code. The original designer of the password verification code for the wallets was a hobbyist who relied on some code that had been written by a student for a paper. There is much more to this story. "If You Created a Bitcoin Wallet Before 2016, Your Money May Be at Risk."

The group of experts who conducted the investigation has now formed a new company to facilitate cleaning up the existing problem and to investigate other potential security problems in crypto-finance markets. The new company is named Unciphered, LLC.

For your discussion post, address the following within the context of the above scenario:

1. Is the problem in this scenario an example of moral hazard or adverse selection? Why
2. Identify at least one other possible market failure that may be present in the cryptocurrency market. Is the failure due to moral hazard or adverse selection?
3. Suggest at least one possible source of market failure that may be present in the generative AI market.

Respond to a Peer

To earn full credit for your discussion, you must complete one post and one follow-up or reply to a classmate. Make sure both the post and the reply focus on the questions asked.

Format your work according to Strayer Writing Standards. The library is your home for SWS assistance, including citations and formatting. Please refer to the Library site for all support. Check with your professor for any additional instructions.