The major problems caused by imperfect information in insurance markets are

Question

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Moral hazard occurs when the behavior of the insured party changes in a way that raises costs for the insurer because the insured party is less careful about avoiding the insured risk, knowing they have coverage. Adverse selection happens when there is asymmetric information between the insurer and the insured before the transaction occurs, leading to the insurer covering those more likely to need the insurance, thus raising costs. Both are primary issues in insurance markets related to imperfect information.

The Major Problems Caused by Imperfect Information in Insurance Markets