The market failure that can justify government provision of insurance is (c) Adverse selection and moral hazard.

Here's why:

(a) Adverse selection: This occurs when there's asymmetric information before a transaction occurs. In the context of insurance, those who know they are high risk are more likely to buy insurance, leading to higher than average costs for insurance companies. This can lead to market failure as insurance companies may increase premiums or refuse to insure, leaving high risk individuals without coverage. Government provision of insurance can help ensure these individuals are covered.

(b) Moral hazard: This occurs when there's asymmetric information after a transaction occurs. In the context of insurance, once insured, individuals may take on more risk because they know they are covered. This can lead to market failure as it can increase the costs for insurance companies, leading to higher premiums for everyone. Government provision of insurance can help control these costs.

Therefore, both adverse selection and moral hazard can justify government provision of insurance.

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The market failure that can justify government provision of insurance is (c) Adverse selection and moral hazard.

Here's why:

(a) Adverse selection: This occurs when there's asymmetric information before a transaction occurs. In the context of insurance, those who know they are high risk are more likely to buy insurance, leading to higher than average costs for insurance companies. This can lead to market failure as insurance companies may increase premiums or refuse to insure, leaving high risk individuals without coverage. Government provision of insurance can help ensure these individuals are covered.

(b) Moral hazard: This occurs when there's asymmetric information after a transaction occurs. In the context of insurance, once insured, individuals may take on more risk because they know they are covered. This can lead to market failure as it can increase the costs for insurance companies, leading to higher premiums for everyone. Government provision of insurance can help control these costs.

Therefore, both adverse selection and moral hazard can justify government provision of insurance.

Knowee AI · Accepted Answer

The market failure that can justify government provision of insurance is (c) Adverse selection and moral hazard.

Here's why:

(a) Adverse selection: This occurs when there's asymmetric information before a transaction occurs. In the context of insurance, those who know they are high risk are more likely to buy insurance, leading to higher than average costs for insurance companies. This can lead to market failure as insurance companies may increase premiums or refuse to insure, leaving high risk individuals without coverage. Government provision of insurance can help ensure these individuals are covered.

(b) Moral hazard: This occurs when there's asymmetric information after a transaction occurs. In the context of insurance, once insured, individuals may take on more risk because they know they are covered. This can lead to market failure as it can increase the costs for insurance companies, leading to higher premiums for everyone. Government provision of insurance can help control these costs.

Therefore, both adverse selection and moral hazard can justify government provision of insurance.

Which market failure can justify government provision of insurance: (a) Adverse selection* (b) Moral hazard (c) Adverse selection and moral hazard (d) None of the other answers

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