Question

What does the concept of adverse selection predict about the existence of “all you can eat” restaurants? Carefully explain your answer

Answer 1

The concept of adverse selection explains that in the absence of complete information there can be a problem of selecting people who are not to be selected and people cannot differentiate between worthy and unworthy individuals. This concept predicts that "all you can eat" restaurants should not exist. In these types of restaurants, the pricing is done on the basis of the average amount consumed. For example, if the average amount consumed is of $10 then the price will be more than that and some might consume way more than that and some might consume less than that. But the restaurant cannot predict the nature of the consumers and can end up having people who consume more than the price they pay. In this situation, the restaurant will end up making the loss. So the adverse selection predicts that "all you can eat" restaurants should not exist.