Asked by Jacob Matthews on Jun 12, 2024
Verified
You insure your car against theft.Consequently,you rarely lock the car.This example illustrates the problem of:
A) adverse selection.
B) moral hazard.
C) positive correlation.
D) risk aversion.
Moral Hazard
A situation where one party in an agreement can take risks because the other party bears the consequences of those risks.
Theft
The act of stealing, or unlawfully taking someone else's property without their permission with the intent to permanently deprive them of it.
Lock
A mechanism for controlling access, ensuring security by preventing or limiting access to a location or object.
- Learn about the theory of moral hazard and how it influences the activities of persons and companies.
Verified Answer
JV
Jennifer VallejoJun 18, 2024
Final Answer :
B
Explanation :
The situation described in the example is an illustration of moral hazard. Moral hazard occurs when insurance causes the insured party to take more risks because they are not bearing the full cost of their actions. In this case, the car owner is taking more risk by not locking their car, because they know they are insured against theft. This behavior increases the likelihood of theft, which raises costs for the insurance company and can result in higher premiums for all policyholders.
Learning Objectives
- Learn about the theory of moral hazard and how it influences the activities of persons and companies.