Government intervention is frequently justified in insurance markets due to the presence of market failures caused by:
A) adverse selection and competitive screening.
B) competitive screening and competitive signaling.
C) over-signaling and under-screening.
D) advantageous selection and market unraveling.

Question

Quizplus · Accepted Answer

Adverse selection, where higher risk individuals are more likely to purchase insurance than lower risk individuals, can lead to an unsustainable risk pool for insurers. This can result in higher premiums for all consumers and potentially leave some with no access to affordable insurance. Competitive screening, where insurers use information to selectively insure lower risk individuals, can exacerbate adverse selection and lead to further market failures. Therefore, government intervention, such as mandating insurance coverage or regulating pricing and underwriting practices, may be necessary to ensure a functional and equitable insurance market. Competitive signaling, over-signaling, and advantageous selection are not commonly recognized sources of market failures in insurance markets.

Government Intervention Is Frequently Justified in Insurance Markets Due to the Presence