Private insurance companies have been out of the flood insurance ...

[K@]

Private insurance companies have been out of the flood insurance business for decades. After their departure the government has gone into the business by granting coverage with below-market premiums.
 
  Why might this be in inefficient outcome? Comment on the amount of housing that we should expect to see along our nation's coastlines. Also, discuss the degree of danger that this poses for both property and lives when hurricanes strike.

Question 2

Why does the government intervene in the market for research, especially medical research?
 
  What will be an ideal response?

[brittanywood]

Answer to Question 1

It encourages people to build or stay in homes in risky low-laying areas. If these homeowners faced the true cost of their decisions there would likely be less build up of residential construction along the coastlines and hurricanes would also be less deadly since fewer people would reside in these areas.

Answer to Question 2

The usual justification for government involvement in research in general, and in medical research in particular, is that research and innovation create positive externalities,but much of the social value of these innovations does not accrue to the innovating firm. This means that although research has a high social value, private firms do not have an incentive to invest in costly research and development. The government steps in to subsidize research so that private firms continue to invest in research and innovation.
A-head: ECONOMICS OF HEALTH
Concept: Government intervention in health markets