Adverse selection in insurance markets occurs because:

Question

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B) High-risk individuals are more likely to seek insurance, raising costs and potentially driving low-risk individuals out. Adverse selection: information asymmetry before transaction. High-risk buyers more likely to purchase insurance → pool worsens → premiums rise → low-risk drop out → death spiral. Solutions: mandatory coverage, screening.

Adverse selection in insurance markets occurs because:

✓ Correct Answer: Option B

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