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 ...

Get Foundations of Economics, 8th Edition now with the O’Reilly learning platform.

O’Reilly members experience live online training, plus books, videos, and digital content from nearly 200 publishers.