Question

How does the market for lemons relate to the health insurance market?

Answer 1

Lemon market can be defined a market in which there is uncertainty about the quality of the product. It means only one party have perfect knowledge about the product. Lemon market were used for the first time for the market for used car.

Since moral hazard problem arises when there is asymmetric information between two parties and there is a change in the behavior of one party after a deal has happened. On the other hand, an adverse selection problem arises when there's a lack of symmetric information prior to a deal between a buyer and a seller.

Since in case of health insurance, an insurance consumer has perfect information about his health but the company the insurance seller do not have perfect information about the health of the policy holder.

Since in case of health insurance there is asymmetric information, so in this way health insurance is also an example of the lemon market because in this also only one party has perfect knowledge.