Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It leads to increased consumer welfare as buyers become more informed
B
It causes consumers to take on more risk than they would otherwise, potentially decreasing overall welfare
C
It eliminates the need for regulation in markets
D
It ensures fair pricing for all consumers
Understanding the Answer
Let's break down why this is correct
Answer
Moral hazard occurs when one party in a transaction takes risks because they do not bear the full consequences of those risks. In welfare economics, this often happens when consumers have less information than sellers, leading to poor decision-making. For example, if a person buys a used car without knowing its history, they might trust the seller's claims and overlook potential issues, thinking they are getting a good deal. This lack of information can lead consumers to demand more of a product than they should, as they feel secure in their purchase despite possible hidden problems. Overall, moral hazard can distort consumer demand by encouraging riskier choices and reducing the overall efficiency of the market.
Detailed Explanation
Moral hazard means people may take more risks when they feel protected. Other options are incorrect because Some think that more information always helps buyers; It's a common belief that markets can self-regulate.
Key Concepts
moral hazard
welfare economics
Topic
Consumer Demand and Information Asymmetry
Difficulty
medium level question
Cognitive Level
understand
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