Episode Five: The Moral Hazard

photo credit: <a href='http://www.flickr.com/photos/thomashawk/29848730/'>Thomas Hawk</a>

photo credit: Thomas Hawk

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What is a Moral Hazard? To economists, it is a state that exists when people tend to take more risks knowing that someone else will bear the costs.

 

This state of hazard can be created by laws, contracts and regulations in any area, but the most common example is from the insurance industry. People might be less vigilant about locking their car doors if they know their losses will be covered if someone breaks into their vehicle.

It sounds like a situation that could be fixed with loophole-proof laws, and iron clad contracts right? Well, not so fast. Economists say that a little bit of moral hazard is needed to keep the mortgage and insurance industry running, and furthermore, it could be what drives a huge chunk of the Canadian economy.

On this week's show well hear from economist Steven Tomlinson about why Moral Hazards are so vexing and fascinating. We'll take you to a U.S. town that's used as a textbook example of what happens where moral hazard runs amok, and get some thoughts from U.P.E.I's George Jia on why a little bit of moral hazard can actually be a very good thing for the economy.