In the market for insurance,the adverse selection problem arises because
A) fair odds are different for different people,and the insurance company cannot tell who is who.
B) people tend to behave more recklessly when they are insured.
C) some events simultaneously affect a large number of people.
D) insurance companies must tilt the odds in their favor to cover their basic operating costs.

Question

Quizplus · Accepted Answer

The adverse selection problem arises because fair odds are different for different people, but the insurance company cannot tell who is who. This leads to the possibility that high-risk individuals are more likely to purchase insurance, while low-risk individuals may opt out, resulting in an imbalance in the risk pool that can make it more difficult and expensive for insurers to provide coverage.

In the Market for Insurance,the Adverse Selection Problem Arises Because