Which of the following is not an example of moral hazard?
A)Investment banks use 40-1 leverage, knowing that if the market collapses, the government will come to the rescue.
B)Domestic automobile companies fail to design high-quality fuel-efficient cars, hoping that the government will save them if oil prices skyrocket.
C)A backcountry skier takes an excessively dangerous run, knowing that local rescue crews will come to his aid if he gets in an accident.
D)Insurance companies stopped offering insurance policies in New Orleans after a major hurricane, knowing the government will offer subsidies to draw people back.

Question

Quizplus · Accepted Answer

Moral hazard occurs when a party is more likely to take risks because they know they won't have to bear the full consequences of their actions. Choices A, B, and C all illustrate situations where entities or individuals might engage in riskier behavior because they expect to be bailed out or rescued. However, choice D describes a situation where insurance companies are reacting to risk by withdrawing services, not engaging in riskier behavior because of a safety net.

Which of the Following Is Not an Example of Moral