What is the buying and selling risk insurance reduces

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What is the buying and selling risk? Insurance reduces the risk that people face by sharing or pooling the risks Pay a premium If unwanted event occurs, insurance company pays out the amount of the insured lost An insurance company that remains in business collects at least as much in premiums as it pays out in benefits People buy insurance because they are risk averse Insurance is a profitable business and there is a gain from trading risk If the insurance company is a monopoly, the insurance company can take all the gains from trading risk Conclusion: To be insurable, a risky event must be observable to both the buyer and seller of insurance. What is private information? Information about the value of the item being traded that is possessed by only buyers or sellers is called private information A market in which the buyers or sellers have private information has asymmetric information Adverse selection is the tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the uninformed party Moral hazard is the tendency for people with private information, after entering into an
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