Adverse selection arises when:
A) the wants of both parties are aligned with one another.
B) buyers and sellers have different information about the quality of a good or the riskiness of a situation.
C) buyers and sellers with the same information about the quality of a good or the riskiness of a situation seek each other out.
D) people behave in a riskier way because they have incomplete information.

Question

Quizplus · Accepted Answer

Adverse selection occurs when buyers and sellers have different information about the quality of a good or the riskiness of a situation, leading to one party taking advantage of the other. This is often seen in situations like insurance or the used car market, where the buyer may have less information than the seller about the true quality of the product being purchased. Choices A, C, and D do not accurately describe adverse selection.

Adverse Selection Arises When