The problem of moral hazard arises because
A)life is full of all sorts of risks.
B)after people buy insurance,they have less incentive to be careful about their risky behavior.
C)a high-risk person is more likely to apply for insurance than is a low-risk person.
D)insurance companies go to great effort to avoid paying claims to their policy holders.

Question

Quizplus · Accepted Answer

Moral hazard refers to the tendency of individuals to take on greater risks or behave recklessly because they are protected by insurance. This occurs because individuals who have insurance are less likely to feel the financial consequences of their actions. For example, someone who has car insurance may drive more recklessly because they know that if they get into an accident, their insurance company will cover the damages. Thus, option B is the best choice. The other options are not directly related to the problem of moral hazard.

The Problem of Moral Hazard Arises Because