Which of the following is an example of adverse selection ?
Buying health insurance
Buying health insurance option is correct.
Adverse selection describes the market failure that arises before a contract is signed, when one party has hidden information about a relevant characteristic. Individuals who know they are high-risk are more likely to purchase insurance than low-risk individuals, so at any given premium the pool of buyers is riskier than the population average.
Health insurance is the textbook illustration: chronically ill or high-risk applicants self-select into policies, forcing insurers to raise premiums, which drives out the healthier applicants and can unravel the market (Rothschild–Stiglitz).
The used-car problem popularised by Akerlof is also an adverse-selection example, but it is generally the seller who has hidden information about quality; in the MH-SET framing focused on buying, the buyer-side adverse selection driver — where the insurer cannot observe the buyer’s risk type — is health insurance. Buying a high-quality product or investing in capital markets does not turn on hidden characteristics of the buyer.
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