Jane builds her home in an area that is at high risk for flooding, instead of on higher ground. She does so because the low-lying area has a better view and she can get flood insurance. This is an example of
A)adverse selection due to seller private information.
B)adverse selection due to market-based private information.
C)moral hazard.
D)incentive neglect.

Question

Quizplus · Accepted Answer

This is an example of moral hazard because Jane's decision to build in a high-risk area is influenced by the availability of flood insurance, which reduces the financial risk to her personally. This insurance availability changes her behavior, leading her to take a risk she might not otherwise take if she had to bear the full cost of potential flooding.

Jane Builds Her Home in an Area That Is at High