Chapter 9 Market Failure: Imperfect Information, External Benefits, and External Costs

22) Deposit insurance creates a moral hazard that depositors have less incentive to monitor their bank.

Recall the Application about how having car insurance affects driving behavior to answer the following question(s).

23) Recall the Application. The theory of moral hazard suggests that uninsured drivers drive less carefully than insured drivers.

24) Recall the Application. When a state makes car insurance compulsory, decreasing the number of uninsured drivers, roads tend to become less hazardous.

25) What is moral hazard?

26) Health insurance leads to what types of moral hazards?

27) What are the main differences between adverse selection and moral hazard in the insurance market?

28) Why can car insurance companies charge higher auto rates for new customers than for established customers, all else held constant?

29) Suppose that everybody pays the same price for auto insurance. What should happen to the price of insurance if the law changes from a system where there is mandatory auto insurance to one where there is voluntary auto insurance?

Recall the Application about how having car insurance affects driving behavior to answer the following question(s).

30) Recall the Application. Explain the effect of mandatory car insurance laws on the number of traffic accidents and fatalities.

9.4 External Benefits and Public Goods

1) A market in which there are neither external benefits nor external costs is

A) efficient.

B) inefficient.

C) efficient and equitable.

D) impossible.