Question

Insurance is designed to protect drivers from a catastrophic loss in form of their savings put in the car as well as paying for the other party’s car if they are at fault. The occurrence of these events is not planned and therefore it allows the driver to have peace of mind to know if anything was to happen, they are covered. It does not necessarily mean they will drive recklessly. The system of insurance is designed in a way to incentivize good driving whilst punishing bad driving. The other factor to consider is how the liability insurance and accident rates are thought to have direct correlation. This is a myth because most drivers without insurance are more likely to more careful in order to avoid drawing attention for themselves from the police if something was to happen. Most people are economically motivated, which means they tend to comply especially when there is a negative or positive economic consequence involved. Knowing you will bear all the liability of a car accident is can make a driver to be more defensive because he might fear the high economic cost f having to pay for the damages of his car and the other car if he is to blame. This can also include the medical costs if they are any serious injuries. In the USA these have skyrocketed in the past decade and will make any reckless driver to think twice before being reckless thereby making roads safer.

Please respond in 100-150 words

Answer 1

In this case the case of moral hazard has been pointed out which arises due to assymetric information problem . This is a common problem that insurance companies face . Even in case of a health insurance , a person who is covered tends to live a more reckless and unhealthy life style since he knows that all his medical expenses will be covered by the insurance . Similarly in this case the driver indulges into such a practice which is known as the moral hazard problem in economics . To avoid accidents arising due to this problem certain liability should always be put on the driver so that he avoids such recklessness .