What is moral hazard?
Q: What is moral hazard?
A: Moral hazard is a term used in economics to describe a situation in which someone makes a decision about how much risk to take, but someone else will bear the cost if things go wrong.
Q: What is an example of moral hazard?
A: An example of moral hazard would be if someone bought insurance against automobile theft and then became less careful about locking their car since the expected consequences of theft are partly the responsibility of the insurance company.
Q: Who coined the term "moral hazard"?
A: The term "moral hazard" is often credited to economist Kenneth Arrow, although Nobel laureate Paul Krugman has also written about it extensively.
Q: Is moral hazard a positive or negative situation?
A: Moral hazard is generally considered a negative situation because it can lead to irresponsible behavior and increased risk-taking.
Q: Can moral hazard occur in non-financial situations?
A: Yes, moral hazard can occur in non-financial situations as well, such as the example of automobile theft insurance.
Q: How can moral hazard be prevented?
A: Moral hazard can be prevented by ensuring that those who make risky decisions also bear the consequences if things go wrong, such as requiring individuals to take out insurance policies with higher deductibles.
Q: What is the opposite of moral hazard?
A: The opposite of moral hazard is moral suasion, which is when someone is encouraged to act in a responsible manner even if they are not personally responsible for the consequences of their actions.
