Scenario: Edward has inherited a house. As the house is far away from where he lives currently, it has been vacant for the past few years. A housekeeper is paid regularly to look after the house and keep it clean. However, because Edward seldom visits the house, the housekeeper does not clean the house regularly.
-Refer to the scenario above.The housekeeper's behavior is an example of ________.
A) the moral hazard problem
B) a positive externality
C) the prisoners' dilemma
D) the tragedy of the commons

Question

Quizplus · Accepted Answer

The housekeeper's behavior is an example of the moral hazard problem. This occurs when one party (in this case, Edward) takes risks because they know another party (the housekeeper) will bear the consequences of their actions. The housekeeper is paid to clean the house, but since Edward rarely visits, the housekeeper may not feel the need to clean it regularly. This is because the consequences of not cleaning the house regularly ultimately fall on Edward, not the housekeeper.

Scenario: Edward Has Inherited a House