/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q6. People drive faster when they ha... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 4: Q6. (page 93)

People drive faster when they have auto insurance. This example illustrates

  1. adverse selection.
  2. asymmetric information.
  3. moral hazard.

Short Answer

Expert verified

Option (c): Moral hazard

Step by step solution

01

Step 1. People driving faster after getting auto insurance

People drive faster after getting auto insurance is a problem of moral hazard. Moral hazard refers to the problem of asymmetric information that results in a cost for one party due to the other party's actions that occur after a contract/agreement or market exchange.

People know any accidents that could damage the vehicle will be covered by the insurance company, and therefore, they can choose to drive faster. The outcome of the bad decisions will put a cost on the insurance company that they did not know when selling the insurance.

02

Step 2. Reasons for incorrect options

Adverse selection is the problem of lemons. This happens when one party is unaware of certain information about the other party before entering into a contract or market exchange. This leads to a selection of bad goods or services, which are referred to as lemons. Since driving faster happens after buying auto insurance, this is not a part of the adverse selection problem.

Asymmetric information problems can result in both adverse selection and moral hazard depending on the reason and time of generation of cost for one party due to another party. Moral hazard is a more precise answer.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

What divergences arise between equilibrium output and efficient output when (a) negative externalities and (b) positive externalities are present? How might government correct these divergences? Cite an example (other than the text examples) of an external cost and an external benefit.

Government inspectors who check on the quality of services provided by retailers and government requirements for licensing in various professions are both attempts to resolve

  1. the moral hazard problem.
  2. the asymmetric information problem.

Why is it in the interest of new homebuyers and builders of new homes to have government building codes and building inspectors?

The LoJack car recovery system allows the police to track stolen cars. As a result, they not only recover 90 percent of LoJack-equipped cars that are stolen but also arrest many auto thieves and shut down many 鈥渃hop shops鈥� that rip apart stolen vehicles to get their parts. Thus, LoJack provides both private benefits and positive externalities. Should the government consider subsidizing LoJack purchases?

Draw a supply and demand graph, and identify the areas of consumer surplus and producer surplus. Given the demand curve, how will an increase in supply affect the amount of consumer surplus shown in your diagram? Explain.
See all solutions

Recommended explanations on Economics Textbooks

Taxation Economics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.