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What is the relationship between consumption and income?

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student’s corner

A student’s view

Connie Lee, a student at the University of Southampton, offers a perspective on this issue of ECONOMIC REVIEW

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In her Fiscal Policy column, ‘Who cares about social care?’ (pp. 6–7), Soumaya Keynes discusses the issues faced by the government when it tries to correct the market failure of private firms in providing insurance for the elderly. Life expectancy has been improving in the UK over time. However, the chances of getting sick or being immobile increase as people age. Elderly people who fall ill may have to pay a high cost for social care, and cannot buy health insurance against this risk. Why not?

Soumaya Keynes wrote about adverse selection, which is a form of market failure, related to asymmetric information. Asymmetric information becomes important when sellers have information that buyers do not have, or vice versa, about some aspect of product quality. George Akerlof explains this in his famous article, ‘The market for lemons’, by describing how buyers find it hard to choose second-hand cars.

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