Describe a situation in which the market fails because of asymmetric information and provide a real-life example

Information asymmetry causes market failure in the insurance industry. It leads to adverse selection and moral hazard types of problems. Moral hazard occurs when an insured party engages in risky activities, for example, skin diving or visits the hospital more often than they would if they did not have an insurance cover. The incentive to engage in such risky activities is provided by the insurance company bearing the costs involved. On the other hand, adverse selection happens when an insured party conceals information about a pre-existing medical condition at the time of taking an insurance cover such that they end up paying less premium than is due. To mitigate problems caused by information asymmetry, the insurance company must conduct proper screening of available information.