Insurance Example

Insurance Example is another example about the The Market for Lemons,

We may consider it as a three level cases of The Market for Lemons ( two levels). In the table here, we have three types of buyers: those who want to buy Low, Medium and High type of insurance. Each has the same proportion.

Since the proportion is the same, so we could easily calculate the average $WTA$ to be $\frac{24+12+6}{3}=14$ and the $WTP$ to be $15$, that is, $WTP>WTA$, so the trade could happen in this case!

HOWEVER, In this case, since the $WTA$ would be $14$, so only the low and medium types are available to buy.

So no High level in the market. Now the $WTA$ becomes $\frac{24+12}{2}=18$, so only Low level are affordable to buy.

Continuously, no one could afford. So no insurance are sold.

Conclusion:

The Insurance Example is another similar example of The Market for Lemons. Both are used to express in average and compare the $WTP$ and $WTA$. What’s more important is that the dynamic procedure, which some (usually better) types of goods leave the market because no buyers afford them, which will change the $WTP$ and $WTA$ again.