You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon.You may treat a car you rented with a little less care than you would use on your own car.
A)Both examples primarily illustrate adverse selection.
B)Both examples primarily illustrate moral hazard.
C)The first example primarily illustrates adverse selection;the second primarily illustrates moral hazard.
D)The first example primarily illustrates moral hazard;the second primarily illustrates adverse selection.

Question

Quizplus · Accepted Answer

The first example primarily illustrates adverse selection because the buyer is concerned that the previous owner may have had private information about the car's poor quality (i.e. it being a "lemon") which was not disclosed. This is a classic example of adverse selection, where the buyer has less information than the seller. The second example primarily illustrates moral hazard because the rental car user may not take the same care of the car as they would of their own, knowing that they are not the ones who will have to pay for any damages. This is an example of moral hazard, where the existence of insurance or a third party who bears the cost of a negative outcome leads to behavior that is riskier than it would otherwise be.

You May Be Unwilling to Buy a Used Car Because