Economics • Economic BasicsMedium
What does 'Moral Hazard' refer to in the economics of information?
A. A situation where one party has more information than another before a transaction occurs
B. A situation where an insured party changes their behavior to take greater risks because they do not bear the full cost of those risks✓ Correct Answer
C. The complete failure of a market due to excessive taxation
D. The moral obligation of corporations to engage in philanthropic activities
💡 Solution & Explanation
Moral hazard occurs when an economic agent alters their behavior to assume greater risks because they are insulated from the full negative consequences, often seen in insurance markets. Adverse selection, by contrast, describes pre-contractual information asymmetries where higher-risk individuals seek coverage more aggressively. Corporate philanthropy and general market failures due to taxation represent entirely different concepts in economic theory.
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