Adverse selection is a market phenomenon wherein people with higher-quality goods are less likely to want to sell them, leading to the average goods on the market being of relatively low quality.
The most famous example is in the used car market.1 A person who owns a reliable car is unlikely to want to sell it, but a person who owns a lemon will very much want to get rid of it.
Adverse selection can lead to market collapse. In the used car example, the seller knows that the car is a lemon. The buyer can only guess, but is aware of the risk. To hedge, they may ask for a lower price, somewhere between the price of an average used car and the price of a lemon. Used car prices thus fall, making owners of reliable cars even less likely to sell, and we have a positive feedback loop.
Adverse selection is a major problem in the insurance industry: people buy insurance specifically when they know they're at risk, so insurers must set prices higher than they would be if average people were buying policies, which makes the policies even less attractive to average people…
cf Gresham's law: “Bad money drives out good”
George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” The Quarterly Journal of Economics 84, no. 3 (1970): 488–500, https://doi.org/10.2307/1879431.