You insure your car against theft.Consequently,you rarely lock the car.This example illustrates the problem of:
A)adverse selection.
B)moral hazard.
C)positive correlation.
D)risk aversion.

Question

Quizplus · Accepted Answer

The situation described in the example is an illustration of moral hazard. Moral hazard occurs when insurance causes the insured party to take more risks because they are not bearing the full cost of their actions. In this case, the car owner is taking more risk by not locking their car, because they know they are insured against theft. This behavior increases the likelihood of theft, which raises costs for the insurance company and can result in higher premiums for all policyholders.

You Insure Your Car Against Theft