Which of the following is an application of the principle of moral hazard?
A) People build homes in areas subject to severe flood damage when federally-subsidized insurance is available.
B) Inappropriate lyrics are available for downloading through the Internet when regulations are not enforced.
C) Actions by one individual have an impact on innocent bystanders.
D) None of the above.

Question

Which of the following is an application of the principle of moral hazard?
A) People build homes in areas subject to severe flood damage when federally-subsidized insurance is available.
B) Inappropriate lyrics are available for downloading through the Internet when regulations are not enforced.
C) Actions by one individual have an impact on innocent bystanders.
D) None of the above.

Quizplus · Accepted Answer

The principle of moral hazard refers to the tendency of individuals to take greater risks when they are insured against potential losses. In this case, people may be more likely to build homes in areas subject to severe flood damage if they know they can rely on federally-subsidized insurance to cover the costs of any damage or losses. This can lead to increased losses for the government and taxpayers who are ultimately responsible for paying for the insurance program.

Which of the Following Is an Application of the Principle