Question

When people by insurance they often adopt risky behavior. this is an example of adverse selection. moral hazard. a negative externality. moral hazard and a negative externality?

Answer 1

This is an example of moral hazard.

Moral hazard refers to the phenomenon where individuals lack the incentive to protect themselves from risk or accidents because they are relying on the fact that they are protected by insurance. An instance of this is when an individual decides to skydive because he or she knows that they will be covered by their health insurance in the event of an accident or injury.