Moral hazard:
A) always happens when adverse selection is a problem.
B) never happens when adverse selection is a problem.
C) can happen when adverse selection is a problem.
D) None of these statements is true.

Question

Quizplus · Accepted Answer

Moral hazard can occur when adverse selection is a problem. Adverse selection refers to a situation where one party in a transaction has better information than the other party, which may lead to the selection of a risky option. Moral hazard, on the other hand, occurs when one party takes risks because they are not fully responsible for the consequences of their actions. Both adverse selection and moral hazard are common problems in insurance markets.

Moral Hazard