Moral hazard refers to the idea that individuals may behave differently when they are insured or protected against losses, which can make it difficult for insurance markets to function efficiently. This can lead to higher costs for insurance, and can encourage risky behavior that leads to more losses. All three options are correct in describing the ways in which moral hazard can impact insurance markets.

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Moral Hazard

Question 168

Multiple Choice

Moral hazard

A) makes a free market in insurance hard to operate.
B) is the tendency of insurance to encourage the source of risk.
C) tends to make the cost of insurance higher and the market for insurance less efficient.
D) All of the above are correct.

Correct Answer: