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You buy a new cellphone and pay $3 per month to insure the phone against damage or loss
You buy a new cellphone and pay $3 per month to insure the phone against damage or loss. What potential problem is now faced by the phone company?
A. unassigned property rights
B. free-rider problem
C. moral hazard
D. tragedy of the commons
Expert Solution
The correct answer to the given question is option C. moral hazard.
In the given scenario, there is an information asymmetry between the cellphone buyer and the insurance provider once the buyer starts using the cellphone. Since the cellphone is insured against damage or loss, the buyer will have an incentive to use the cellphone negligently. This kind of information asymmetry situation is called as a moral hazard problem.
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