Ben is an aggressive driver so he is more likely to buy auto insurance.This situation illustrates the idea of
A) moral hazard.
B) adverse selection.
C) the lemon problem.
D) inefficiency.
E) a pooling equilibrium.

Question

Quizplus · Accepted Answer

Adverse selection refers to a situation where one party in a transaction has more information than the other, which leads to the selection of suboptimal or unfavorable insurance policies. Ben being an aggressive driver implies that he is more likely to have an accident and thus may require more insurance coverage, making him a higher risk for the insurance company. Therefore, he is more likely to buy auto insurance, illustrating adverse selection.

Ben Is an Aggressive Driver So He Is More Likely