Chapter 21, Problem 2PS

Summary Introduction

To determine:

The kind of cargo that the ship owner expects to attract, if he advertises a tariff whereby the freight charged per pound for all cargo will be the same.

Introduction:

Adverse selection is a situation, in which one of the party to the insurance, either buyer or seller have some concealed information about the product. Such concealment of information leads to the party lacking knowledge makes certain adverse decision. In the case of insurance, adverse selection is a tendency of insuring high risk profiles. Thus, adverse selection is a situation where insurer provides insurance coverage to an individual whose actual risk is considerably high. Thus, by offering insurance at a cost higher than its actual risk, the insurer suffers adverse effects.