Economists have long argued that, due to moral hazard problems, that bailing out firms such as banks (the S&L crisis), brokerage firms (Bear Stearns, Drexal Burnham) and governments may be bad idea.

2-a-ii. Explain a problem Bail Outs create with adverse selection. What is adverse selection? What is one possible remedy for this adverse selection problem (what are the good and bad points of this remedy)? (5 Points)