Final answer:
The tendency for unhealthy people to seek life or health insurance at standard rates is an example of adverse selection, which is caused by asymmetric information and contributes to strain on the insurance system. It is different from moral hazard, which involves changes in behavior due to the presence of insurance. Option b is correct.
Step-by-step explanation:
The tendency for unhealthy people to seek life or health insurance at standard rates is an example of adverse selection. Adverse selection occurs when groups with inherently higher risks than the average person seek out insurance, placing a strain on the insurance system.
This happens due to an asymmetric information problem, as these buyers have more knowledge about their health risks compared to what the insurance company can reasonably obtain. The insurance company faces challenges in differentiating between high-risk and low-risk buyers, leading to potential financial imbalance.
Moral hazard, on the other hand, refers to a situation where individuals engage in riskier behavior because they are insured. For instance, a person with health insurance may take fewer health precautions, knowing that the insurance will cover medical costs if they fall ill. This is distinct from adverse selection, which is pre-existing and not behaviorally based.