A homeowner discovers that a large tree in his yard is diseased and may fall in a bad windstorm and if it falls, it will likely destroy the garage.The cost to have the tree cut down is significant but the homeowner has an insurance policy and figures that if the tree falls and destroys the garage, the insurance company will pay, and the deductible is less than the cost to have the tree removed.This is an example of:

Question

Quizplus · Accepted Answer

This situation demonstrates moral hazard, as the homeowner is more likely to take risks (not removing the tree) because they know they are insured and will not bear the full cost of the potential damage.

A Homeowner Discovers That a Large Tree in His Yard