Adverse selection exists when
A)the parties on one side of the market, who have information not known to others, self select in a way that benefits the parties on the other side of the market.
B)the parties on one side of a market charge more for something than the parties on the other side of the market want to pay.
C)one party to a transaction changes his or her behavior in a way that is hidden from and costly to the other party.
D)the parties on one side of the market, who have information not known to others, self select in a way that adversely affects the parties on the other side of the market.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one side of the market has better information than the other and uses that information to select options that are unfavorable to the other party. This can lead to a situation where the market becomes dominated by low-quality products or services, leaving consumers worse off. Choice D accurately describes this phenomenon.

Adverse Selection Exists When