Economics • Economic BasicsMedium
Which of the following describes 'Adverse Selection' in economics?
A. A situation where one party takes hidden risks because they are insulated from the consequences.
B. A market situation where buyers and sellers have asymmetrical information before entering a transaction, leading to undesirable results.✓ Correct Answer
C. The decrease in consumer surplus caused by the imposition of a monopoly price.
D. The reduction in investment due to high government borrowing.
💡 Solution & Explanation
Adverse selection arises in markets where asymmetric information exists prior to a contract being signed, causing high-risk individuals or low-quality goods to dominate transactions. Moral hazard refers to a different problem where one party takes hidden risks after a transaction is completed because they are insulated from consequences. This economic concept helps explain market failures in health insurance and credit sectors.
More Economics Economic Basics questions
- Which of the following describes 'Adverse Selection' in asymmetric information economics?
- How does 'Cost-Push Inflation' fundamentally differ from 'Demand-Pull Inflation' within macroeconomic theory?
- What does an analysis of the Lorenz curve and Gini coefficient applied to household consumption expenditure…
- How does the 'Engel's Law' characterize the spending pattern of households as their income increases?
- What is the primary economic consequence of a high Gini coefficient value close to one within a regional…