The state of California set up its own earthquake insurance program for homeowne

Question

The state of California set up its own earthquake insurance program for homeowners. The rates vary by ZIP code, depending on the proximity of the nearest fault line. However, critics claim that the people who set the rates ignored soil type. Some houses rest on bedrock others sit on unstable soil. What are the implications of such rate setting? O A. This rate setting scheme creates a moral hazard problem: Homeowners with houses on unstable soil are less likely to purchase insurance because the rate is O B. This rate setting scheme creates a moral hazard problem: Homeowners with houses on unstable soil are more likely to purchase insurance than homeowners O C. This rate setting scheme creates an adverse selection problem: Homeowners with houses on unstable soil are less likely to purchase insurance because the 0 D. This rate setting scheme creates an adverse selection problem: Homeowners with houses on unstable soil are more likely to purchase insurance than much higher for them. with houses that rest on bedrock. rate is much higher for them homeowners with houses that rest on bedrock.

Explanation / Answer

D> This rate.....

Reason

It is an adverse selection problem because the insurer does not charge a different rate for more risky households in unstable soil, thus they will be more likely to buy insurance than their counterparts.

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