Adverse selection is a problem that arises in markets where:
A)the seller knows more about the attributes of the good being sold than the buyer does
B)the buyer knows more about the attributes of the good being sold than the seller does
C)only used cars are bought and sold
D)both buyers and sellers have the same knowledge about the attributes of the good

Question

Quizplus · Accepted Answer

Adverse selection occurs when the seller has more information about the quality of the product being sold than the buyer. This information asymmetry can lead to the seller taking advantage of the buyer by selling poor-quality products at high prices. As a result, buyers may become hesitant to enter the market, and only those with poor credit or high risk may end up participating, leading to adverse selection. Option B, C, and D are not correct as they do not capture the essence of adverse selection.

Adverse Selection Is a Problem That Arises in Markets Where