Microeconomics
5th Edition
ISBN: 9781319098780
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
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Question
Chapter 20, Problem 13P
To determine
Which of the following situations are an example of adverse selection and which are of moral hazard.
Concept Introduction:
Adverse selection refers to a situation where one party involved in trade has all the information about the product being traded while, the others do not. In other words, the problem of adverse selection results from the asymmetric information in the market.
Moral Hazard refers to a situation where one party provides misleading information to the other party and changes his behavior about protecting the good after being insured from the risk. For example, after taking a life insurance policy the insured party becomes careless about his life and takes more risks. This is a situation of moral hazard.
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