6. Problems in insurance markets Consider the following story: Province Ranch, an industry leading provider in vehicle insurance, recently expanded to cover motorhomes. Province Ranch had concerns that the most likely motorhome insurance customers are those who drive their motorhomes in high-density traffic areas (thus exposing them to the most damage on the road), because they would benefit most from insurance coverage. Since Province Ranch is unable to distinguish perfectly between high-risk and low-risk areas, it raised its motorhome premiums in an effort to account for the riskier drivers. The economic problem in this story is known as: Adverse selection Screening O Signaling Moral hazard

6. Problems in insurance markets Consider the following story: Province Ranch, an industry leading provider in vehicle insurance, recently expanded to cover motorhomes. Province Ranch had concerns that the most likely motorhome insurance customers are those who drive their motorhomes in high-density traffic areas (thus exposing them to the most damage on the road), because they would benefit most from insurance coverage. Since Province Ranch is unable to distinguish perfectly between high-risk and low-risk areas, it raised its motorhome premiums in an effort to account for the riskier drivers. The economic problem in this story is known as: Adverse selection Screening O Signaling Moral hazard

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Moral Hazard

The moral is a person's behavior towards himself /herself, society, organization, and others. Hazard is something that is happening and is not good. A person may be morally good or bad. It depends on his attitude, ethics, integrity, and values. A person may have the highest reverence for money to that for the truth. In this case, the person may lie and it is said that the person is morally bad.

Question

6. Problems in insurance markets
Consider the following story:
Province Ranch, an industry leading provider in vehicle insurance, recently expanded to cover motorhomes. Province Ranch had concerns that the
most likely motorhome insurance customers are those who drive their motorhomes in high-density traffic areas (thus exposing them to the most
damage on the road), because they would benefit most from insurance coverage. Since Province Ranch is unable to distinguish perfectly between
high-risk and low-risk areas, it raised its motorhome premiums in an effort to account for the riskier drivers.
The economic problem in this story is known as:
Adverse selection
Screening
Signaling
Moral hazard

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