In health insurance markets, which concept is most relevant for explaining adverse selection?

• A. Adverse selection is the same as non-excludability.
• B. Health insurance markets face moral hazard but not adverse selection.
• C. Health insurance markets typically face adverse selection because individuals know their risk levels better than insurers.
• D. Adverse selection is only in public goods.

Answer: (C)

Adverse selection in health insurance comes from asymmetric information: individuals know their own health risk better than insurers. Because risk is private, high-risk people are more likely to seek insurance or opt for richer coverage, while low-risk people may skip insurance or choose cheaper plans. This shifts the insured pool toward the sick and costly, pushing up average costs and premiums, which can spiral unless mitigated by measures like mandated coverage or risk-based pricing.

The other statements miss the mark because adverse selection is not about non-excludability—that’s a feature of public goods. Moral hazard is a separate issue that arises after people are insured and alters behavior, but it doesn’t explain why insurers struggle to price or attract a balanced risk pool. And adverse selection can occur in private health insurance markets, not only in public goods contexts.