In California many insurance companies charge different rates depending on what part of the city you live in. Their rationale is that risk factors like theft, vandalism, and traffic congestion vary greatly from one place to the other. The result is that people who live close to each other but in adjacent zip codes may end up paying very different insurance premia.
a. What would happen to an insurance company that decided to sell insurance at the same price to all drivers with the same driving records no matter what part of the city they live in?
b. What would happen if the government decides to outlaw geographic rate differentials, given that the government cannot force private insurance companies to provide insurance against their will?