If adverse selection exists in a market,
A) it increases consumer surplus but reduces producer surplus.
B) it reduces consumer and producer surplus.
C) it reduces producer surplus but has no impact on consumer surplus.
D) it increases both consumer and producer surplus.

Question

Quizplus · Accepted Answer

Adverse selection leads to a market failure, where the quality of goods or services being sold in the market is lower than what the buyer expects. This leads to a reduction in both consumer and producer surplus as buyers are not getting what they paid for, and sellers are not able to charge a higher price for better quality products.

If Adverse Selection Exists in a Market