Which statement describes moral hazard?

• A. The problem occurs after purchase when consumers alter behavior due to insurance coverage.
• B. The problem occurs before purchase when high-risk individuals are more likely to buy
• C. It occurs only in property markets
• D. It cannot be mitigated by information disclosure

Answer: (A)

Moral hazard is a situation where a party insulated from risk behaves differently than they would if they bore the full cost of that risk. After obtaining insurance or some protection, people may take more risks or use more resources because losses are not fully their responsibility.

The statement describes the problem occurring after purchase when coverage changes behavior, which is exactly moral hazard. It contrasts with adverse selection, which happens before a contract when high‑risk individuals are more likely to buy insurance. Moral hazard also isn’t limited to property markets; it appears in health, auto, and many other areas where protection alters incentives. And yes, it can be mitigated through design features like deductibles, co-payments, monitoring, and incentive schemes that keep some cost to the insured.