Question

Which of the following is not an example of moral hazard? Investment banks use 40-1 leverage, knowing that if the market collapses, the government will come to the rescue. Domestic automobile companies fail to design high-quality fuel-efficient cars, hoping that the government will save them if oil prices skyrocket. A backcountry skier takes an excessively dangerous run, knowing that local rescue crews will come to his aid if he gets in an accident. Insurance companies stopped offering insurance policies in New Orleans after a major hurricane, knowing the government will offer subsidies to draw people back.

Answer 1

Answer: Insurance companies stopped offering insurance policies in New Orleans after a major hurricane, knowing the government will offer subsidies to draw people back. Is not an example of moral hazard.

Explanation: In this case the insurance company is looking for its own benefit.

To be an example of moral hazard, the subject should not try to avoid the risk, beyond being exposed to it.