A situation in which one side of an economic relationship takes undesirable or costly actions that the other side of the relationship cannot observe is called
A) adverse selection.
B) moral hazard.
C) thick markets.
D) an injunction.

Question

Quizplus · Accepted Answer

This situation is known as moral hazard, which occurs when one party takes risks or engages in costly behaviors that the other party cannot observe or prevent. This can arise, for example, when an insured individual takes more risks because they know that their insurance company will cover any losses. The adverse selection refers to a situation in which one party has more information than the other before entering into a contract, while thick markets refer to markets that have many buyers and sellers, leading to more efficient price discovery. An injunction is a court order that requires or prohibits a specific action.

A Situation in Which One Side of an Economic Relationship