A person covered by a generous insurance plan smokes more cigarettes than he does normally.This is an example of a:

Question

Quizplus · Accepted Answer

Moral hazard arises when an individual's behavior changes in response to an insurance contract providing protection. In this example, the person covered by a generous insurance plan is not fully exposed to the cost of smoking as the insurance covers the associated health risks, which creates a moral hazard. As a result, he smokes more than he would have if he did not have the insurance.

A Person Covered by a Generous Insurance Plan Smokes More