The U.S. government establishing a policy that it will bail out troubled financial institutions and a resulting increase in the number of bank failures is an example of:
A)the moral hazard problem.
B)the free rider problem.
C)the adverse selection problem.
D)the "lemon" problem.

Question

The U.S. government establishing a policy that it will bail out troubled financial institutions and a resulting increase in the number of bank failures is an example of:
A)​the moral hazard problem.
B)​the free rider problem.
C)​the adverse selection problem.
D)​the "lemon" problem.

Quizplus · Accepted Answer

The U.S. government establishing a policy of bailing out troubled financial institutions creates a moral hazard problem - this is because it encourages banks to take on more risk knowing that they will be bailed out if things go wrong. The resulting increase in the number of bank failures is also a consequence of this policy and further exacerbates the moral hazard problem.

The US Government Establishing a Policy That It Will Bail Out