OFURES Adverse selection is the phenomenon where it is not possible to have a Pareto improvement, no matter how the government selects the initial distribution of Income B charging a higher insurance premium to cover the costs of risk actually leads to the situation in which only the most risky buy the insurance, and this causes that market to fail. people select the wrong indifference curve. information is withheld from the government so it cannot make the necessary selection of the correct amount of public good to produce