Which of the following is an example of moral hazard?
A) Only people with very high risk of default on loans borrow from banks.
B) Drivers have less incentive to avoid accidents after getting auto insurance.
C) When one bank fails, other banks become more cautious in lending.
D) People living along the Gulf Coast are more likely to buy flood insurance.

Question

Quizplus · Accepted Answer

Moral hazard occurs when one party takes greater risk because another party bears the cost of those risks. In this case, drivers with auto insurance may have less incentive to drive cautiously because the insurance company will bear the cost of any accidents.

Which of the Following Is an Example of Moral Hazard