Which situation describes a Moral Hazard?

Moral hazard refers to the principle that individuals may take on greater risks if they do not bear the full consequences of those risks, particularly when they have insurance coverage. In this case, driving recklessly because of auto insurance coverage exemplifies a moral hazard. The driver might feel incentivized to engage in dangerous behavior, believing that the insurance will cover any potential damages or accidents that arise from their reckless driving.

The situation illustrates how insurance can alter behavior; the assumption is that the presence of insurance may lead individuals to act less cautiously than they would if they were fully responsible for the outcome. This relationship between insurance and risk behavior is a critical concept in understanding moral hazard.

Other scenarios provided do not align as closely with the definition of moral hazard. For instance, leaving a door unlocked because of lower crime rates reflects a calculated risk based on perceived external conditions rather than an insurance-influenced behavior. Not checking smoke detectors because of homeowners insurance indicates negligence but does not directly imply an intention to exploit insurance benefits. Engaging in theft is a premeditated criminal act that does not qualify as moral hazard since it involves illegal behavior independent of insurance considerations.