According to experts, the basic idea behind the economic concepts of market for lemons is a situation where information asymmetry exists. It is pertinent to note that market for lemons is a situation that can actually develop without an effective signaling mechanism. On the other hand, in economic theory, a term moral hazard indicates a situation where a certain party will have the tendency of taking risks simply because the same party will not actually feel the cost of the risk taking action. This essay elaborates the concepts of lemons in the market and moral hazard effects, as well as the description of the kind of counter measures that are supposed to be used to address the situation of market for lemons and moral hazard effect in the economics of information security.
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To commence with, it is pertinent to evaluate the market of lemons issue. As stated above, a market of lemons is a condition where the sellers have more information than the buyers (Moore & Anderson, 2006). This usually happens because the buyers get certain kind of incentive, for instance lower price in exchange for lemons. According to the information provided, it is true to state that information security has become fast moving and thrilling discipline in the market. The users, who are the buyers here, often experienced security failure, which is caused primarily by bad incentives. With the little knowledge they have regarding the system, they end up being manipulated in a negative way.
According to the passage, this situation is witnessed in some UK banks, where because of misaligned incentives the banks are liable for the card fraud cost. However, when a customer disputes such transaction, the banks either try to show that the customer is trying to cheat, or they are forced to offer a refund. Here, the customers have little information regarding the banks automated machine to the extent that the banks have the right to refuse to refund. Yet the banks are ones with the full knowledge regarding the automated machines and their transactions with their software use. In other words, this is an evidence of lemons. In addition, the concept is outlined in the manner that individuals, who connect an insecure computer to the network, and go scot-free due to their knowledge, are oppressing th end users. The connectors, who are the sellers, have complete knowledge of the type of network they are connecting the insecure computers to. However, the users, both banks and individuals, bear the risks.
Secondly, considering the moral hazards theory, it is necessary to note that this situation will occur prior to the situation when one party may change to detriment the other party when actual financial transaction has taken place. In most cases, this situation will be witnessed by the insurance firms. With regard to this information, it is true to affirm that in economics of information security, the deployment of computer systems and the impact of externalities bring out a perfect resemblance of the moral hazard effects. The insecurity of network resembles either traffic congestions or air pollution. Therefore, people who either knowingly or unknowingly connect insecure machines to the Internet do not actually bear the full consequences of their actions as supposed to. In this way, it is evident that this system of market is directly related to a person who gets insurance finances and does not actually get affected in any way; rather the other one party bear negative consequences. With that, it is better to note that the managers should ensure that liabilities are assigned to the party that can effectively manage the risks.
Now, having stated the concepts of lemon for market and moral hazards effect above, it is pertinent to note that a solution has to be introduced to solve this issue, with the aim of fully countering this situation for the benefit of all the parties involved. This will ensure equal distribution of resources, benefits and privileges that might arise in the cause of using the system itself. The measures that could counter this phenomenon can either be technological improvement, new policy introduction or change on the managerial level. It all depends on the effectiveness of the measures. One of the suitable methods is the use of technology. Here, the developers should possess proper information on how the users are being manipulated. With complete information at hand, IT professionals can carry the entire burden regarding economic information security systems. During the next step, the developers will make their efforts to code the system in a way that the service to their clients will be delivered properly. This application, if well established, will erode or curb the two potential negative impacts, hence meeting the requirements of the users.
Other pertinent measures are the change on the managerial level. Managers should bear all the responsibilities for ensuring that the users are safe when it comes to the market for lemons. By taking the responsibility managers can make a campaign of educating the buyers or the users on the economics of information security. As a result, those who come to install the network on computers, will do it with the understanding of fact that customers do not possess sufficient knowledge of how it operates. On the other hand, on the managerial level all managers need to understand that the information is passed on to the users. Users have to be informed about what they are using and how to operate it.
Apart from the two methods discussed above, another option can be introduction of new policy. For instance, actions of individuals, who borrow money from the insurance firm knowing that he or she cannot be affected, should be perceived as an offense that needs to be punished. A policy should be passed, which then requires very harsh disciplinary actions. These actions should apply to those who make mistakes for their own benefit. According to the passage, there are individuals who install unsecure computers for the network usage purposes bearing in minds that they will not in any way get affected. These are the cases of moral hazards in the market, and so, a policy should be formulated, in a way that individuals involved should be punished.
In summary, this essay illustrates both the market for lemons and moral hazards effect in practice. Basing the arguments on economics of information security, it is evident that the end users of any information system are not aware on how the softwares actually operate. That is how the buyers, who are also the end users, are being manipulated. Therefore, this situation is an example of “market for lemons”. On the other hand, those who install insecure computers for the network usage purposes should be accountable, because if anything happens they will not be affected directly. However, they bring about the moral hazards in the economics of information security.
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