Chapter EMC, Problem 1CYU

To determine

To discuss: How the lower car insurance premium due to no moving tends to decrease the potential inefficiencies caused by adverse selection.

Explanation of Solution

The main inefficiency caused by adverse selection is that one part has more knowledge about the things than the other but in this case, the insurance company is offering a very good deal that your car Insurance premium will be lower if you have had no moving violations for several years. So, in this case, the seller cannot hide any information from the customer and has to sell the insurance as per the rules and norms stated. So, in this case, both the buyers and sellers are in the same position that both of them have the same knowledge about the things in hand.

Economics Concept Introduction

Introduction:

Adverse selection happens when one person is familiar with more about the way things are than other people. Adverse selection exists, for example, when sellers propose items of mainly low quality for sale, and when the people with an extreme need for insurance are those who are almost certain to buy it.