Which of the following are examples of the moral hazard problem?
i. the employment relationship between a worker and an employer
ii. an insured homeowner who buys too many fire extinguishers
iii. homeowners who choose to live in a high flood risk area when the government bears the cost of disaster relief
A) (1) any
B) (i) and (ii)
C) (i) and (iii)
D) (ii) and (iii)

Question

Quizplus · Accepted Answer

Moral hazard occurs when one party takes more risks because another party bears the cost of those risks. In (i), an employee might exert less effort if they know their employer cannot perfectly monitor their actions. In (iii), homeowners might be less cautious or choose riskier locations if they know disaster relief costs are covered by the government. (ii) is not an example of moral hazard; buying too many fire extinguishers is an act of caution, not risk-taking due to someone else bearing the cost.

Which of the Following Are Examples of the Moral Hazard