In the case of the insurance equilibrium with low and high risk drivers, market failure represents:
A)the choice by high- risk drivers to buy insurance.
B)low premiums.
C)the choice by low- risk drivers not to buy insurance.
D)the choice by low- risk drivers to buy insurance.

Question

Quizplus · Accepted Answer

Market failure in the context of insurance for low and high-risk drivers occurs when low-risk drivers choose not to buy insurance. This happens because the premiums set by insurance companies often reflect the average risk, making insurance too expensive for low-risk drivers and leading them to opt out. This exacerbates the problem of adverse selection, where insurance companies are left with a pool of high-risk drivers, leading to higher premiums and potentially a market failure.

In the Case of the Insurance Equilibrium with Low and High