12.2 Information Problems in Insurance Markets

MyEconLab Concept Video

Just as buyers and sellers gain from trading goods and services, so they can also gain by trading risk. But risk is a “bad,” not a good. The good that is traded is risk avoidance. A buyer of risk avoidance can gain because the value of avoiding a risk is greater than the price that must be paid to others to get them to bear shares of the risk. And a seller of risk avoidance faces a lower cost of risk than the price that people are willing to pay to avoid it.

People trade risk in financial markets and insurance markets. Here, we’ll ­focus on insurance markets.

Insurance Markets

You can see in Eye on the U.S. Economy below that insurance plays a huge role in our economic ...

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