Question

For each scenario, indicate whether it is an example of adverse selection of sellers, adverse selection of buyers, or moral hazard.

1. Adverse selection of sellers
2. Adverse selection of buyers
3. Moral hazard
Option
a. People with asthma are more likely to buy health insurance. Answer bank
b. Your local seafood shop advertises fresh seafood, but you are not certain if the seafood is actually fresh or if it has been frozen.
c. You hire your neighbor to check on your cat every day while you are traveling for the week. The neighbor checks on your cat every other day instead.

Answer 1

Adverse selection of buyers is illustrated by people with asthma buying health insurance, adverse selection of sellers is shown by a seafood shop's unclear freshness of products, and moral hazard is exemplified by a neighbor neglecting agreed-upon pet care. These concepts showcase problems of asymmetric information and altered incentives in transactions.

Step-by-step explanation:

Understanding the concepts of adverse selection and moral hazard is crucial in fields like economics and insurance. Adverse selection occurs when one party in a transaction has more information than the other, often leading high-risk individuals to purchase insurance while low-risk individuals opt out, thereby increasing costs. Conversely, moral hazard arises after a transaction occurs, when the secured party has incentives to engage in riskier behavior because the risk is borne by another party.

Scenario Analysis

1. People with asthma are more likely to buy health insurance. - Adverse selection of buyers
2. Your local seafood shop advertises fresh seafood, but you are not certain if the seafood is actually fresh or if it has been frozen. - Adverse selection of sellers
3. You hire your neighbor to check on your cat every day while you are traveling for the week. The neighbor checks on your cat every other day instead. - Moral hazard