Which of the following can create inefficiency and deadweight loss?
A) Moral hazard can create inefficiency and deadweight loss but adverse selection cannot.
B) Adverse selection can create inefficiency and deadweight loss but moral hazard cannot.
C) Both moral hazard and adverse selection can create inefficiency and deadweight loss.
D) Neither moral hazard nor adverse selection can create inefficiency and deadweight loss.
E) None of the above answers is correct because whether inefficiency and deadweight loss are created depends on whether the moral hazard and adverse selection affect demanders or suppliers.

Question

Quizplus · Accepted Answer

Both moral hazard and adverse selection can create inefficiency and deadweight loss. Moral hazard occurs when one party has asymmetric information about the actions of the other party and takes more risks than they would if they were fully informed. This can lead to inefficient and wasteful behavior. Adverse selection occurs when one party has better information than the other party and selectively enters into a transaction. This can lead to inefficient outcomes because the parties with more information may choose not to enter into transactions that would otherwise be beneficial. Both of these situations can create inefficiencies and deadweight loss.

Which of the Following Can Create Inefficiency and Deadweight Loss