Question

Moral hazard is present when?

1) There are different types of individuals and it is difficult to tell the different types apart
2) The marginal cost of the last unit is smaller than the marginal benefit
3) A particular action changes incentives for behavior for some people
4) There are large external costs

Answer 1

Moral hazard refers to the case when people engage in riskier behavior with insurance than they would if they did not have insurance.

Step-by-step explanation:

Moral hazard refers to the case when people engage in riskier behavior with insurance than they would if they did not have insurance. For example, if you have health insurance that covers the cost of visiting the doctor, you may be less likely to take precautions against catching an illness that might require a doctor's visit. If you have car insurance, you will worry less about driving or parking your car in ways that make it more likely to get dented. In another example, a business without insurance might install absolute top-level security and fire sprinkler systems to guard against theft and fire. If it is insured, that same business might only install a minimum level of security and fire sprinkler systems.