Question

Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

a. Irene's but not Victor's
b. both Irene's and Victor's
c. Victor's but not Irene's
d. neither Victor's nor Irene's

Answer 1

A) Irene´s but not Victor´s

Step-by-step explanation:

Moral Hazard is an economic concept (Adam Smith) that describes certain situations in which one of the actors is aware of the negative consequences of his/her actions, but the other individuals involved the same scenario are not, being the last one´s in possible harm due to the first one´s actions.

• Irene took a job in which she knows will be driving dangerously in the street (maybe she´s a 30 minute pizza delivery) so she take precautions. The problem is, that all the other people driving in the same street as she is, are not aware of her job, making them assume more risk for Irene´s fast driving than herself:

If there´s an accident bewteen Irene and, let´s say Luis, and Luis has no auto insurance, then Luis will be suffering more than Irene, even though he wasnt the one fast driving. Irene´s action illustrate what moral hazard is.

• Victor, on the other hand, by going less to the gym is not putting in possible harm other people (only maybe himself), he is clearly not inducing a moral hazard.