Which of the following can create inefficiency and deadweight loss?
A) Moral hazard can create inefficiency and deadweight loss but adverse selection cannot.
B) Adverse selection can create inefficiency and deadweight loss but moral hazard cannot.
C) Both moral hazard and adverse selection can create inefficiency and deadweight loss .
D) Neither moral hazard nor adverse selection can create inefficiency and deadweight loss .
E) None of the above answers are correct because whether inefficiency and deadweight loss are created depends on whether the moral hazard and adverse selection affect demanders or suppliers.

Question

Quizplus · Accepted Answer

Both moral hazard and adverse selection can lead to inefficiency and deadweight loss. In the case of moral hazard, the agent may take risks that they otherwise would not have taken, resulting in a suboptimal outcome. In the case of adverse selection, the average quality of goods or services may decline due to a lack of information, leading to a suboptimal outcome.

Which of the Following Can Create Inefficiency and Deadweight Loss