In a health insurance market where asymmetric information exists, some buyers have better knowledge of their health status than insurers. Suppose the insurers cannot distinguish between high-risk and low-risk buyers, and therefore charge a premium based on the average risk. Which of the following is a likely outcome in this scenario?
1
Low-risk individuals are more likely to buy insurance due to lower premiums
2
High-risk individuals benefit from the average premium and low-risk individuals may leave the market, leading to adverse selection
3
The market will achieve a Pareto-efficient outcome with no market distortion
4
The government will need to intervene to ensure that high-risk individuals are charged higher premiums than low-risk individuals
5
Question Not Attempted