Adverse selection is a market situation where:
High-risk individuals are more likely to purchase insurance, while sellers lack the information to distinguish them from low-risk individuals.
Individuals behave more recklessly after obtaining insurance because they do not bear the full cost of any potential loss.
A third party experiences a spillover cost from a transaction between a buyer and a seller.
Consumers undervalue the private benefits of a merit good due to imperfect information or myopic decision making.
