ADVERSE SELECTION

Adverse selection is a market situation where buyers and sellers have different information, leading to the unequal distribution of benefits to both parties[1]. This occurs when there is asymmetric information between buyers and sellers, distorting the market and leading to market failure[3]. Adverse selection can occur in various scenarios, such as in the insurance industry where those in high-risk lifestyles or dangerous jobs are more likely to purchase life or disability insurance, leading to higher premiums[2]. Another example is the second-hand car market, where the seller may have better information about the true quality of the car than the buyer, leading to buyers being reluctant to pay a decent price[3]. Adverse selection can also result from government regulations prohibiting insurers from setting prices based on certain information, known as "regulatory adverse selection"[1]. If risk aversion is higher among lower-risk customers, adverse selection can be reduced or even reversed, leading to "advantageous" selection[1]. 

In summary, adverse selection is a phenomenon that occurs when one party has more information than the other party in a transaction, leading to an unfair benefit for one party and market failure.

Citations:

[1] Wikipedia

[2] investopedia

[3] economicshelp

[4] albany

[5] wallstreetmojo

[6] healthinsurance