How do adverse selection and moral hazard affect the market for insurance?
What will be an ideal response?
Both adverse selection and moral hazard drive up the price of insurance. People with a higher probability of the insurable outcome are the ones who buy the insurance (adverse selection), and having insurance increases the probability of the insurable outcome occurring because the person no longer tries as hard to avoid the outcome (moral hazard). Adverse selection and moral hazard may drive the price up so much that some people don't want to buy the insurance.
You might also like to view...
If the value of the U.S. dollar changes from 1.2 euros to 1.4 euros, we would expect that the United States would experience a ________ in exports and a ________ in imports
A) rise; rise B) fall; fall C) rise; fall D) fall; rise
Betty consumes only milkshakes and sandwiches and maximizes her total utility. Suppose that the prices of a milkshakes and sandwiches both double and at the same time Betty's income doubles
Betty buys ________ sandwiches and her marginal utility from sandwiches ________. A) more; increases B) fewer; decreases C) more; decreases D) the same number of; remains the same