The government of Perinthia provided generous unemployment benefits to all unemployed workers in the country.However,the new government that came into power reduced the amount of unemployment insurance paid to each worker.This increased the average number of hours that unemployed workers spent daily looking for jobs.This suggests that ________ exists in the labor market in Perinthia.
A) the problem of moral hazard
B) the tragedy of the commons
C) a pecuniary externality
D) a positive externality

Question

Quizplus · Accepted Answer

The problem of moral hazard occurs when individuals change their behavior in a way that is riskier or less desirable from another party's perspective because they are insulated from the consequences of their actions. In this case, when unemployment benefits were generous, workers had less incentive to look for jobs, demonstrating moral hazard. Reducing the benefits increased their job search efforts, indicating that the generous benefits had previously reduced their incentive to find employment.

The Government of Perinthia Provided Generous Unemployment Benefits to All