Insurance policies typically stipulate a deductible amount which the insured must pay; this is to address the problem of
A) adverse selection.
B) externalities.
C) moral hazard.
D) public goods.

Question

Quizplus · Accepted Answer

The purpose of a deductible is to address the problem of moral hazard, which is the tendency for people to take greater risks or be less careful when they are insured, because they know that the insurance company will cover any losses. By requiring the insured to pay a deductible, they have some skin in the game and are less likely to engage in risky behavior that could cause a claim. Adverse selection is when only those who are high-risk sign up for insurance, externalities relate to costs that are not directly borne by the insured or insurer, and public goods are non-excludable and non-rivalrous goods. None of these relate to the purpose of a deductible.

Insurance Policies Typically Stipulate a Deductible Amount Which the Insured