explain how adverse selection and morale hazard apply to an all you can eat buffet?

Answer 1

I think the question is misinformed. Adverse selection and moral hazard are problems that arise in an environment of asymmetric information. In an all-you-can-eat buffet there is no fundamental asymmetric information problem.

What you are really talking about here is non-satiation of demand under zero marginal pricing. This means that I pay a fixed amount for a buffet but each additional unit costs me nothing more. In reality, of course, people are satiated; your stomach is only SO big, after all. But it is an important economic issue. I remember a friend of mine who went to an all you can eat buffet and sat there studying back in college. After some time, the manager came over and said "You've been here for FIVE hours! You're bad for business! You go now!"

Regarding your question, you could instead posit a buffet which is open to all but for which people pay for one plate. In other words, there is a buffet set up that is open to everyone in the restaurant. A customer walks in the door and pays for X number of plates up front. Then, they are supposed to only take X number of plates. If they take more, they are supposed to pay for it. However, the restaurant finds it difficult or impossible to monitor how much each person takes. There exists an asymmetry of information between customers and the restaurant management; the customers know how much they expect to take and the management does not and cannot enforce the limits. So, every rational customer will pay for one plate because there is no penalty to paying for one plate and taking more. This is a classic asymmetric information environment which will lead to market failure because the restaurant will eventually serve many people many more plates of food than they pay for.

The adverse selection problem is described classically by Akerlof's lemons problem. In this problem, used car dealerships either sell lemons (bad used cars) or peaches (good used cars). The dealership knows if a particular car is a lemon or a peach. Potential buyers do not. The buyers instead pay an intermediate price for each car that is between the value of a lemon and that of a peach. This intermediate price is higher than the value of lemons and lower than the value of peaches to the sellers so the sellers eventually flood the market with lemons and no peaches. Buyers, knowing this, will not pay any money for a car (lemon) and the market fails to provide a sufficient environment for the exchange of goods (peaches), even though they exist and customers demand them. This problem is a direct result of the asymmetry in information between the buyers and sellers. The solution in our society is signals/screens such as warranties. A warranty tells the buyer that the seller knows this car to be "good". This is a credible signal because if the seller is lying and the car is a lemon it is costly to the seller because (s)he has to fix the car.

A classic example of the moral hazard problem is one in which there is an owner of a store who hires a manager to run it. The manager can put in a lot of effort or a little effort. All things being equal, if the manager puts in more effort the store does better and the owner is happier. However, the manager values leisure (equivalently, effort is costly to the manager) and so would rather put in minimal effort but for maximum payoff. The problem arises in how does the owner provide sufficient "pre-emptive" incentive for the manager to work harder in an uncertain external environment if (s)he cannot monitor the manager's effort directly. The solution in our society to this problem is appropriate contracting. As an example, the reason we grant stock and stock options to executives (managers) of public companies is because it aligns their own payoffs/incentives with the stockholders (owners). If we instead gave every CEO a cash salary, they would have no direct incentive to work hard at making the company better because they would get the same payment regardless of the company's performance.

As I always say, long but precise answers are rarely short.

Hope this helps. :)

Answer 2

Morale Hazard

Answer 3

Moral hazard in all you can eat buffets causes people to eat more than they should (because extra food is essentially 'free')
Adverse selection, because the restaurants know people do this, charge a higher flat fee.

What happens is that people (who eat reasonably) who would be willing to pay a 'fair' price for an "all you can eat" buffet don't go because the flat price is too high (to cover the people who gorge themselves).

Answer 4

Economic explanation:

Endless supply allows consumers to over consume. When they (consumers) begin, the amount of food may be limited by the size of their stomack. Many consumers will maintain their consumption by keeping with what their stomack can hold (maintaing a level demand). However, a few who have addictions may strech their stomacks thereby increasing thier demand. In responce the body will then store the excess reserves consumed in the forms of fat.

The moral learned by "Endless Supply" is possibility of "Endless Demand" to meet the supply.

Answer 5

How else do You explain the fact that They always run out of the things that You like first? Conspiracy? Pan-Global manipulation Your taste buds? I think not!