In insurance markets, moral hazard creates economic inefficiency because:

A) insurance companies are price setters rather than price takers.
B) insurance products are not homogenous goods.
C) there are many buyers but only a few sellers.
D) insured individuals do not correctly perceive the costs or benefits of their actions.

Moral Hazard

A situation in which one party is more likely to take risks because they do not bear the full consequences of their actions, often due to asymmetrical information or misaligned incentives.

Economic Inefficiency

A situation in which resources are not allocated optimally, leading to wastage or less than maximum output.

Insurance Markets

Markets where individuals and entities can purchase insurance products to protect against various types of risk.