a) Explain in clear language the economic inefficiency associated with adverse selection. Adverse selection arises from asymmetric information, where the individual buying insurance has a better idea of their actual health status is than the insurance company does. People who are in worse health are more likely to demand insurance, which raises the average cost of insurance. The inefficiency associated with adverse selection is that even though the marginal cost of insuring a healthier individual is lower than their willingness to pay so trade should occur, they are priced out of the market and so do not buy insurance