What is an example of a moral hazard?

A moral hazard refers to a situation where a person's behavior changes as a result of having insurance coverage or protection in place. This change in behavior can lead to increased risk because the individual may engage in riskier activities, believing that the consequences will be mitigated by insurance.

The correct answer involves being careless with security measures, such as not locking car doors. This scenario exemplifies moral hazard because the presence of insurance might lead an individual to take less care in securing their property, knowing that they have protection in case of theft. The thought process is that if something does happen, the insurance will cover their loss, thus potentially encouraging careless behavior.

In contrast, neglecting to insure property or storing explosives in an unprotected manner would represent a different kind of risk behavior that doesn't stem from the influence of having insurance. Similarly, riding a bicycle without a helmet relates to personal safety rather than to the concept of moral hazard, as this choice does not indicate a change in behavior influenced by the presence of insurance.