$100 each. Another 30 of the drivers have medium-sized accidents that cost an average of $1,000 in damages,

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and 10 of the drivers have large accidents that cost $15,000 in damages. For the moment, let’s imagine that at

the beginning of any year, there is no way of identifying the drivers who are low-risk, medium-risk, or high-

risk. The total damage incurred by car accidents in this group of 100 drivers will be $186,000, that is:

16.2 • Insurance and Imperfect Information 395

If each of the 100 drivers pays a $1,860 premium each year, the insurance company will collect the $186,000

that is needed to cover the costs of the accidents that occur.

Since insurance companies have such a large number of clients, they are able to negotiate with health care and

other service providers for lower rates than the individual would be able to get, thus increasing the benefit to
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