Which of the following is the best example of an adverse selection problem?
A) Once individuals are insured, they are less likely to take efficient precautions.
B) Individuals are unlikely to pay for something if they can receive the benefits for free.
C) When a firm pollutes the air, families living nearby suffer the consequences.
D) Individuals who seek to purchase health insurance have better information about their health than do insurance companies.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party in a transaction has more information than the other, leading to an imbalance. In this case, individuals seeking health insurance have more information about their health status than the insurance companies, which can lead to higher-risk individuals being more likely to purchase insurance.

Which of the Following Is the Best Example of an Adverse