When sellers are unable to distinguish "good" buyers from "bad" ones, they face the problem of
A) moral hazard.
B) adverse selection.
C) externalities.
D) diminishing utility.

Question

Quizplus · Accepted Answer

The problem described in the question is that of adverse selection. Adverse selection occurs when one party in a transaction has more information than the other party, and uses that information to their advantage. In this case, sellers are unable to distinguish between "good" (i.e. profitable) buyers and "bad" (i.e. unprofitable) buyers, so they are at risk of only attracting the latter. This can lead to a situation where the seller loses money on the transaction, which is why adverse selection is a problem.

When Sellers Are Unable to Distinguish "Good" Buyers from "Bad