Economics • Economic BasicsMedium
Which of the following describes 'Adverse Selection' in information economics?
A. A situation where one party has more information than another before entering a transaction, leading to market failure.✓ Correct Answer
B. An increase in risky behavior by insured parties after securing protection.
C. A condition where market prices perfectly reflect all publicly available information.
D. The tendency of firms in oligopoly to secretly collude on output quotas.
💡 Solution & Explanation
Adverse selection describes a pre-transaction market failure scenario where asymmetric information leads one party to possess superior knowledge, often causing high-risk participants to disproportionately seek contracts like insurance. Post-transaction risky behavior is known instead as moral hazard, which represents a separate economic concept. Microeconomics and market failure principles are regular features of competitive economics papers.
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