Question

Government inspectors who check on the quality of services provided by retailers and government requirements for licensing in various professions are both attempts to resolve

1. the moral hazard problem.
2. the asymmetric information problem.

Short answer

Option (b): the asymmetric information problem

Step-by-step solution

Step 1. Meaning of asymmetric information 

Asymmetric information is when one party does not have adequate information to make a good decision while involved in market exchange. This asymmetry results in inefficient allocation of scarce resources as it is impossible to distinguish trustworthy sellers and buyers from untrustworthy ones.

For example, a buyer of an old house does not have the same amount of information about the quality of the structure and durability compared to the seller of the old house. This results in an asymmetry information problem when a buyer buys a poor-quality house due to the lack of information.

Step 2. Government checks and licensing to prevent asymmetric information problem

The government inspectors checking the quality of services given by retailers and the requirement for licensing reduce the cost of obtaining information about sellers in different professions. This helps the buyers to make informed decisions.

For example, A bad surgeon can result in loss of life for the patient. If there is a lack of information to distinguish between good and bad surgeons, there will be few surgeries due to high risk. A consumer will have to incur high costs to obtain the needed information. Thus, there is a low number of surgeries due to high-risk expectations.

The government checks and licensing resolve this asymmetric information problem (market failure). It provides consumers with information about the quality of services, and thus, reduces risk expectations, allowing efficient allocation of resources.

Step 3. Reason for incorrect option (a)

A moral hazard is a situation of lack of information about the buyers where the reckless behavior of a buyer puts a cost on the seller party. These are deliberate actions of the buyers. Government licensing and quality checks are concerned with the lack of information about the sellers of goods and services.