Adverse selection
A)occurs when the overall quality of choices facing a consumer is very low.
B)is a greater problem for employees than employers.
C)occurs more frequently in the market for new cars than used cars.
D)is not easily remedied by free markets.

Question

Quizplus · Accepted Answer

Adverse selection is a situation where sellers have information that buyers do not have, or vice versa, about some aspect of product quality. In the context of markets, it refers to a scenario where the presence of information asymmetry leads to high-quality goods being squeezed out of the market by low-quality goods, because buyers cannot accurately assess the quality of a product. This problem is particularly pronounced in markets where it's hard for buyers to distinguish between high-quality and low-quality products before purchase, such as the insurance market. Free markets often struggle to correct for adverse selection on their own because the root of the problem lies in asymmetric information, which market mechanisms alone may not be able to resolve without external interventions like regulations or signaling mechanisms (e.g., warranties, certifications).

Adverse Selection