In reality, markets involving risk and uncertainty are plagued by market failures.Market failure occur because:

Question

Quizplus · Accepted Answer

Adverse selection and moral hazard are common causes of market failure in industries involving risk and uncertainty. Adverse selection occurs when one party in a transaction has more information about the risks involved than the other, resulting in the less informed party being more likely to buy insurance. This can lead to a lack of profitability for insurers and a reduction in the availability of insurance products. Moral hazard occurs when one party begins to take greater risks because they are insured, leading to increased claims and higher premiums. Together, these factors can create inefficiencies in the market and lead to market failure.

In Reality, Markets Involving Risk and Uncertainty Are Plagued by Market