If the moral hazard problem in automobile driving were to be eliminated, the marginal cost of driving would be:
A) lowered enough to pull the amount of driving back down to the efficient level.
B) lowered enough to raise the amount of driving back up to the efficient level.
C) raised enough to pull the amount of driving back down to the efficient level.
D) raised enough to raise the amount of driving back up to the efficient level.
E) lowered back down to the efficient level, relieving the stress on market forces.

Question

Quizplus · Accepted Answer

The moral hazard problem in automobile driving refers to the fact that when individuals are insured against accidents, they tend to drive more recklessly, causing an increase in accidents and therefore an increase in the cost of insurance premiums. If the moral hazard problem were to be eliminated, individuals would bear the full cost of their driving behavior and would drive more cautiously, leading to a decrease in accidents and a reduction in the cost of insurance premiums. However, because driving imposes external costs on society in the form of congestion, pollution, and accidents, the efficient level of driving is lower than the level of driving that would prevail in the absence of these external costs. Therefore, eliminating moral hazard would raise the marginal cost of driving and pull the amount of driving back down to the efficient level.

If the Moral Hazard Problem in Automobile Driving Were to Be