Economics • Economic BasicsMedium
Which of the following describes 'Moral Hazard' in information economics?
A. A situation where one party has more information than the other before a transaction occurs.
B. A situation where a party whose actions are unobserved takes more risks because they do not bear the full costs of those risks.✓ Correct Answer
C. The refusal of banks to lend money to low-income borrowers.
D. The tendency of buyers to withdraw from a market due to rising prices.
💡 Solution & Explanation
Moral hazard arises when an economic agent protected from risk alters behavior to act less prudently because another entity bears the resulting costs. Conditions involving hidden information prior to a transaction describe adverse selection rather than moral hazard.
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