Suppose that individuals with state-independent and risk-averse tastes insure each other through state-contingent trades.The competitive equilibrium price will then result in actuarily fair insurance terms.

Question

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In a market with risk-averse individuals, the competitive equilibrium price for insurance typically includes a risk premium above the actuarially fair price. This is because insurers need to charge more than the expected loss to cover administrative costs and to compensate for the risk they assume.

Suppose That Individuals with State-Independent and Risk-Averse Tastes Insure Each