Question
An insurance provider offers car insurance to customers although it cannot directly observe their risk profiles (how good or bad they are as drivers). Suppose
An insurance provider offers car insurance to customers although it cannot directly observe their risk profiles (how good or bad they are as drivers). Suppose the insurance company was forced to provide a common insurance plan at a single price to all customers. What kind of customers would be most likely to buy insurance? Does this constitute a market failure? If so, of what kind? Now, suppose that while the insurance company cannot directly observe customer's risk profiles, it does observe various attributes of drivers such as their age, marital status, gender, driving history, etc. and that these attributes are highly correlated with risk. Can price discrimination along these attributes improve welfare? Explain your reasoning.
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