CA Foundation P4 · Chapter 7 · Question 7 of 15
After buying comprehensive vehicle insurance, a driver becomes careless about locking his car. This is an example of:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Moral hazard
Explanation
Moral hazard arises after a transaction, when one party changes behaviour because the other bears the risk and cannot fully monitor actions. Adverse selection arises before a transaction, when hidden information leads to the wrong type of participants entering the market (e.g., only high-risk people buying insurance).
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