The significant difference between adverse selection problems and moral hazard problems is
A) that adverse selection refers to bad luck,moral hazard refers to bad behaviors.
B) that adverse selection applies to markets for goods,moral hazard applies to markets for services.
C) only identifiable after an action has been taken.
D) that in adverse selection one group of people starts out at a higher risk,while in moral hazard problems,people incur additional risks.

Question

Quizplus · Accepted Answer

Adverse selection refers to situations where one group has information that the other does not, leading to a higher risk for the other group. In moral hazard, both parties have agreed to a certain level of risk, but after the agreement, one party changes their behavior to increase the risk. Therefore, option D is the correct choice as it correctly identifies the difference between adverse selection and moral hazard.

The Significant Difference Between Adverse Selection Problems and Moral Hazard