Which of the following is an example of adverse selection?
A) Overgrazing of a common piece of land
B) A passenger traveling in a subway without a ticket
C) A customer buying a defective appliance from a used goods market
D) The generation of hazardous waste by the production of a good

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party has more information than the other party, leading to a situation where the higher-risk individuals are more likely to participate. In this case, the customer buying a defective appliance from a used goods market is an example of adverse selection because the seller is likely aware of the defect but the buyer is not. The seller is taking advantage of the buyer's lack of information, leading to a situation where only defective goods are being sold in the market.

Which of the Following Is an Example of Adverse Selection