Export Development Canada (EDC)provides insurance to Canadian exporters for their accounts receivable from foreign buyers.If EDC charges an insurance premium that reflects the average level of risk of the exporting firms,it is only the most risky firms that will tend to purchase insurance.This is an example of
A)the free-rider problem.
B)adverse selection.
C)a public good.
D)a common property resource.
E)moral hazard.

Question

Quizplus · Accepted Answer

This situation is an example of adverse selection, where the most risky firms are more likely to purchase the insurance because they perceive a higher risk of non-payment from their foreign buyers. As such, the overall risk profile of the insured group is higher than the average, causing the insurer to charge higher premiums to cover this risk. This, in turn, may deter less risky firms from purchasing insurance, creating a vicious cycle of adverse selection.

Export Development Canada (EDC)provides Insurance to Canadian Exporters for Their