AP MicroeconomicsMarket Failure & Government
Moral Hazard
Moral hazard occurs when one party takes greater risks because they do not bear the full consequences of those risks, often due to insurance or government protection.
This happens after a transaction, such as when people drive recklessly because they have car insurance. It leads to market inefficiency because behavior changes in ways that increase costs for others. Governments may respond with co-pays or monitoring to reduce the incentive to take excessive risks.