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The problem of adverse selection is about asymmetric (unequal) information among opposite parties involved in a transaction. Note, this problem is not just about uncertainty; it is about the risks arising from asymmetric information. As risks increase from adverse selection and/or moral hazard, so do insurance premiums.
As an illustration of asymmetric information in health care insurance marketplace, patients and doctors know more about the health status of an individual, than potential insurance providers do. In addition, we anticipate the demand for health insurance to be greater for prospective individuals with higher health risks than for prospective individuals with lower health risks. Furthermore, individuals with higher health risks are drawn to more generous health insurance plans, while those with lower health risks settle for cheaper insurance plans. When risks in the insurance marketplace rise, so will insurance premiums, potentially causing a death spiral as healthy individuals leave the insurance pool when faced with rising rates.
Given this brief account of adverse selection in the health insurance market place, discuss the following:
This document contains various important questions and their appropriate answers in the subject field of Economics.
Economics is the study of the principles governing the allocation of scarce means among competing ends when the objective of the allocation is to maximize the attainment of the ends.
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