Examples of moral hazard in the following topics:
- Indicate how moral hazard can cause market failures
Examine the concept of adverse selection in the context of imperfect information
Asymmetric information, different information between two parties, leads to the following - adverse selection, moral hazards, and market failure.
- In addition to adverse selection, moral hazards are also a result of asymmetric information.
- For example, moral hazards occur in employment relationships involving employees and management.
- An insured driver getting into a car accident is an example of a moral hazard.
- A lack of equal information causes economic imbalances that result in adverse selection and moral hazards.
- moral hazard (noun) A situation where there is a tendency to take undue risks because the costs are not borne by the party taking the risk.
- This is a classic case of moral hazard: the two parties deciding for the transaction to occur- patients and doctors- are not the same two exchanging money.
- Food and Drug Administration bans harmful drugs, for example; the Occupational Safety and Health Administration protects workers from hazards they may encounter in their jobs; and the Environmental Protection Agency seeks to control water and air pollution.
- Key to Roosevelt's reforms was a belief that poverty usually resulted from social and economic causes rather than from failed personal morals.
- He wrote the Theory of Moral Sentiments in 1759 to describe his view of the role of sympathy and empathy in human behavior.
- Smith recognizes that beneficence and morality cannot be the only mechanism that creates order in society.
- Smith is not the only writer to argue the importance of justice and morality in the proper functioning of society.
- The mechanism by which they are imposed is the moral sense or conscience of the individual" (Robinson, p 5) .
- " Or to quote Ivan Hill:
"Men of many ages have considered the Golden Rule to be the fundamental moral imperative.
- Hazard pay is a type of compensating differential.
- Private solutions to externalities include moral codes, charities, and business mergers or contracts in the self interest of relevant parties.
- There are several types of private solutions to market failures:
Moral codes: Moral codes guide individuals' behavior.
- The likelihood of being fined may be small, but moral codes provide an incentive to refrain from littering.
- These systems include (but are not limited to) economic, political, religious, social, geographic, demographic, legal, and moral systems.
- Adam Smith [1723-1791], Thomas Malthus [1766-1834] and David Ricardo [1772-1823]), economics was treated as part of philosophy, religion and/or moral philosophy.
- Regulations were established to protect the public from airborne contaminants that are hazardous to human health.
- Religious and moral beliefs may alter the way in which knowledge is used.
- [Smith, Wealth of Nations, p 734-735]
Smith, a professor of moral philosophy, constructed a system to explain a set of forces that would guide social and economic behavior.
- In The Theory of Moral Sentiments  he showed the need for justice and a system of morality.
- Smith describes a social system that requires morality, markets and jurisprudence to guide and constrain individual action in a social context.