Moral hazard:
A)increases the ability of markets to allocate risk efficiently.
B)decreases the ability of markets to allocate risk efficiently.
C)has no impact on the ability of markets to allocate risk efficiently.
D)encourages the provision of 100% insurance coverage.

Question

Quizplus · Accepted Answer

Moral hazard decreases the ability of markets to allocate risk efficiently by creating a situation where those who are insured or protected from risk may take on more risky behavior because they are not fully bearing the cost of their actions. This can lead to adverse selection and an increase in the cost of insurance or other risk management tools.

Moral Hazard