What is an example of a moral hazard?

A moral hazard refers to a situation where one party takes risks because they do not have to bear the full consequences of their actions, often due to an insurance policy that mitigates their financial responsibility. In this context, lighting a candle close to draperies and leaving the house demonstrates a lack of concern for the potential outcomes of that risky behavior, particularly because if a fire were to occur, the individual may rely on insurance coverage to alleviate the financial impact of the damage caused.

This scenario exemplifies moral hazard as it involves taking a risk with the expectation that any negative impact will be partially or fully insured, thus potentially encouraging reckless behavior. The individual may not prioritize safety, knowing they have a safety net in the form of insurance, which can lead to increased risks and losses for the insurer.

The other options, while they involve risky behaviors, do not align as clearly with the concept of moral hazard. For instance, increasing insurance right before a natural disaster may indicate opportunistic behavior but doesn’t exemplify the ongoing behavior change typically associated with moral hazard. Neglecting to repair a broken tail light or failing to secure a building are examples of negligence or lack of maintenance, which don't directly connect to the concept of relying on insurance to avoid consequences, making