Adverse selection | Market failure

Adverse selection is a market failure that is both an information problem and an insurance problem. Adverse selection means that a person with an information advantage is utilizing this at someone else's expense.

Examples of adverse selection can be that people who know that they have high risks and huge damages signs insurance policies without telling about the risks involved. Adverse selection means that the market economy does not work optimally because some are deceived by others. It becomes a distorted price structure.