If adverse selection exists in a market,
A)the government steps in and shuts it down.
B)the market is considered a "grey market."
C)consumers may not participate in the market at all.
D)total surplus is maximized.

Question

Quizplus · Accepted Answer

Adverse selection occurs when buyers and sellers have asymmetric information, meaning one party has more information than the other. In this case, buyers may be hesitant to participate in the market because they cannot accurately assess the quality of the product or service being sold, leading to a potential mismatch and lower satisfaction. Therefore, answer choice C makes the most sense as consumers may choose not to participate in the market at all to avoid the risk of adverse selection. None of the other choices make sense in the context of adverse selection.

If Adverse Selection Exists in a Market