Question

Define adverse selection in one sentence. Then, in two to three sentences, discuss why the repeal of the individual mandate will exacerbate adverse selection.

Answer 1

The Adverse selection refers the generally to a situation where sellers have information that buyers don’t have, / vice versa, about some aspect of product quality. In case of insurance, adverse selection is the tendency of those in dangerous jobs / high-risk lifestyles to get life insurance.

How Adverse Selection Works

Adverse selection describes an undesired result due to situation where one party of a deal has more accurate & different information than other party. Party with less information is at a disadvantage to party with more information. Asymmetry causes a lack of efficiency in price & quantity of goods & services. Most information in a market economy is transferred through prices, which means that adverse selection tends to result from ineffective price signals.