Suppose the U.S. government announced a policy that it would bail out troubled financial institutions, and this resulted in an increase in the number of bank failures. This is an example of:
A)the moral hazard problem.
B)the free-rider problem.
C)the adverse selection problem.
D)the lemon problem.
E)the tragedy of the commons.

Question

Quizplus · Accepted Answer

The policy of bailing out troubled financial institutions creates a moral hazard problem, where the institutions may take excessive risk knowing that the government will bail them out if they fail. As a result, this can lead to an increase in the number of bank failures.