1)Explain Adverse selection.

2)Explain Moral hazard.

1)An adverse selection is a phenomenon in Economics where there is an information asymmetry between two parties involved in a transaction before the transaction takes place. Such existence of information asymmetry usually causes advantage or benefit to one party at the expense of another party.

An example of adverse selection is a situation where a health insurance policy provider issues a protection cover to an individual who is at high risk on account of unhealthy diet consisting of liquor, oily foods, sugar-intensive foods etc. Thus, the insurance holder gets benefited in case any health issue arises to him or her in future.

2)A moral hazard phenomenon occurs when there is information asymmetry between the two parties involved in a transaction once the transaction takes place. Such information asymmetry usually leads to increase in benefits of one party at the expense of another party.

An example of such phenomenon is a health insurance policy sold by an insurance provider to an individual where the individual starts eating unhealthy foods such as fried items, sugar-coated items, liquor etc. once the protection cover commences for him or her.