After purchasing fire insurance,a firm decides to cut costs by reducing spending on fire prevention.This is an example of:

Question

Quizplus · Accepted Answer

This is an example of moral hazard, where the insured party changes their behavior after obtaining insurance, taking more risks because they know they are covered in case of a loss. In this case, the firm reduces spending on fire prevention because they assume the insurer will cover any damages from a fire.

After Purchasing Fire Insurance,a Firm Decides to Cut Costs by Reducing