Adverse selection and moral hazard do not affect the efficiency of the market.

Question

Quizplus · Accepted Answer

Adverse selection and moral hazard both affect the efficiency of the market by creating information asymmetry and distorting the allocation of resources. Adverse selection occurs when one party has more information than the other, leading to the selection of bad quality products or services. Moral hazard occurs when one party takes more risks as they are insulated from losses, leading to inefficient outcomes. Both these phenomena lead to a suboptimal allocation of resources and market failure.

Adverse Selection and Moral Hazard Do Not Affect the Efficiency