Question

1. Which of the following quotes is a good description of the moral hazard problem?

1. Milton Friedman: “Nobody spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own.”
2. Di Lorenzo: “Whenever government allocates resources … the more affluent in the society will always receive a disproportionate share of the benefits.”
3. Von Mises: “Motorcars, television sets and refrigerators do not make a man happy. As soon as some of his wishes are satisfied, new wishes spring up.”
4. George Orwell: “On the whole human beings want to be good, but not too good, and not quite all the time.”

2. The primary enforcement mechanism for the 1962 Kefauver-Harris Amendments to the Food, Drug and Cosmetic Act was

1. A shift in power from pharmaceutical companies to the FDA   
2. Positive inducement in the form of patent protection for FDA-approved drugs
3. A set of rules establishing standards for drug testing
4. Negative inducement in the form of fines imposed on companies who bring unsafe drugs to the market

Answer 1

1. (A) Milton Friedman: “Nobody spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own.”

Moral hazard occurs when an individual has an incentive to increase their exposure to risk because they do not bear the full costs of that risk. For example, when a person is insured, they may take on higher risk knowing that their insurance will pay the associated costs. That is, it represents lack of incentive to guard against risk where one is protected from its consequences. Thus Friedman's quote aptly describes it.

Lorenzo's quote talks about equity and equality. Von Mises quote talks about unlimited human wants. Orwell's quote reflects human morality.

2. (A) A shift in power from pharmaceutical companies to the FDA.

It introduced a requirement for drug manufacturers to provide proof of the effectiveness and safety of their drugs before approval, required drug advertising to disclose accurate information about side effects, and stopped cheap generic drugs being marketed as expensive drugs under new trade names as new "breakthrough" medications.