If a person drives with less care after purchasing auto insurance, this situation would be an example of a(n)
A) reverse wealth problem.
B) negative externality problem.
C) adverse selection problem.
D) moral hazard problem.

Question

Quizplus · Accepted Answer

This situation describes a moral hazard problem. Moral hazard refers to the idea that individuals may take on more risk or engage in riskier behavior after they are insured because they no longer bear the full cost of their actions. In this case, the driver may feel less incentivized to drive carefully because they know that their insurance will cover any damages or accidents that may occur.

If a Person Drives with Less Care After Purchasing Auto