The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers.
-In a pooling equilibrium,there is ________ of insurance in the market for safe drivers,and there is ________ of insurance in the market for aggressive drivers.
A) overprovision; underprovision
B) overprovision; overprovision
C) underprovision; underprovision
D) underprovision; overprovision
E) underprovision; an efficient quantity

Question

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers.
-In a pooling equilibrium,there is ________ of insurance in the market for safe drivers,and there is ________ of insurance in the market for aggressive drivers.
A) overprovision; underprovision 
B) overprovision; overprovision 
C) underprovision; underprovision 
D) underprovision; overprovision 
E) underprovision; an efficient quantity

Quizplus · Accepted Answer

In a pooling equilibrium, insurance companies cannot differentiate between safe and aggressive drivers due to asymmetric information. Therefore, they charge a premium that reflects the average risk. This leads to underprovision of insurance for safe drivers, as the premium is too high for their risk level, and overprovision for aggressive drivers, as the premium is too low for their risk level.

The Figures Show Two Auto Insurance Markets, One Market for Safe