Explain how moral hazard could arise in the following situations. a. The federal
ID: 1119236 • Letter: E
Question
Explain how moral hazard could arise in the following situations.
a.
The federal government offers flood insurance for homes.
b.
An NBA player signs a long-term guaranteed contract.
c.
The government lengthens the time to collect unemployment benefits from 26 to 99 weeks.
d.
In an area where the roads are frequently snow-covered and icy, a person trades in her rear-wheel drive sports car for a four-wheel drive SUV.
a.
The federal government offers flood insurance for homes.
b.
An NBA player signs a long-term guaranteed contract.
c.
The government lengthens the time to collect unemployment benefits from 26 to 99 weeks.
d.
In an area where the roads are frequently snow-covered and icy, a person trades in her rear-wheel drive sports car for a four-wheel drive SUV.
Explanation / Answer
ans is B
Moral hazard means one party is taking risk at the expense of other.Thus an NBA player signs a long term guaranteed contract can misuse the guarantee and can cause moral hazard problem.
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