Problem

How can moral hazard lead to more costly insuranc…

01:24

Problem 12 Easy Difficulty

What is the problem of moral hazard?

Answer

Moral hazard is the situation when the person who has taken insurance behaves in careless
manner and does not take appropriate precaution that one would take without being covered for
insurance because he knows that insurance company would be the one which will pay for the
loss.

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Principles of Microeconomics for AP® Courses

Chapter 16

Information, Risk, and Insurance

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Video Transcript

Hey, everyone. Today we're answering problem number 12 from Chapter 16 of the textbook, which asks us what is the problem of moral hazard. So in our textbook, they really have an entire section dedicated to explaining the moral hazard problem as well as the waste to reduce it. So I'm just going to read out loud what more hazard is on the give you an example. More hazard refers to the case when people engage in riskier behavior with insurance than they would if they did not have insurance. For example, if you have health insurance that covers the cost of visiting a doctor, you may be less likely to take precautions against catching an illness that might require doctors was. If you have car insurance, you will worry less about driving or parking your car in ways that make it more likely to get dentist in another example. A business without insurance. My insult. Absolute top level security and fire sprinklers to guard against theft and fire. If it is insure that same business might Onley install a minimum level security and filers fire sprinkler system. So clearly it's like when you have your insurance, you're gonna be a little risk here. You're gonna guess Care a little less about damage because you have insurance back you up. Um And then what is the cause of this problem? Well, in perfect information is the cost of Morehouse a problem? If an insurance company has perfect information on risk, it could simply raise its premiums every time and ensure party gets engages in riskier behavior. However, an insurance company cannot monitor all the risks that people take all the time. And so even with various chucks and cost sharing, moral hazard will remain a problem. So because of in perfect information, moral hazard will remain a problem. So the answer, The question, I would say I would definitely give me that permission of what more Ha's eaters Right here. Circle that. And then I also state that, um, I may be given example, like with either health insurance for insurance, um, or business with insurance or service. It's foul insurance. I'd say in perfect information is the cause of this problem and moral hazard will remain a problem, even though it could be reduced from several different weight. And there you have it. If you guys enjoying my video explanation of this problem, please of the light, but next to it, I hope you'll have, let's say and thank you for watching.

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Steven A. Greenlaw, David Shapiro, Timothy Taylor

Principles of Microeconomics for AP® Courses

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Problem

How can moral hazard lead to more costly insuranc…

Problem 12 Easy Difficulty

What is the problem of moral hazard?

Answer

Moral hazard is the situation when the person who has taken insurance behaves in careless
manner and does not take appropriate precaution that one would take without being covered for
insurance because he knows that insurance company would be the one which will pay for the
loss.

Related Courses

Principles of Microeconomics for AP® Courses

Related Topics

Discussion

Top Educators

Recommended Videos

Watch More Solved Questions in Chapter 16

Video Transcript

Steven A. Greenlaw, David Shapiro, Timothy Taylor

Principles of Microeconomics for AP® Courses

Moral hazard is the situation when the person who has taken insurance behaves in carelessmanner and does not take appropriate precaution that one would take without being covered forinsurance because he knows that insurance company would be the one which will pay for theloss.

Principles of Microeconomics for AP® Courses

Steven A. Greenlaw, David Shapiro, Timothy TaylorPrinciples of Microeconomics for AP® Courses

Moral hazard is the situation when the person who has taken insurance behaves in careless
manner and does not take appropriate precaution that one would take without being covered for
insurance because he knows that insurance company would be the one which will pay for the
loss.

Steven A. Greenlaw, David Shapiro, Timothy Taylor

Principles of Microeconomics for AP® Courses