Which scenario is an example of moral hazard?

Moral hazard refers to a situation where one party is incentivized to take risks because they do not bear the full consequences of those risks, often due to insurance coverage. In this scenario, an arsonist applying for property insurance exemplifies moral hazard. The arsonist has an ulterior motive to commit fraud by setting a fire, knowing that their insurance policy will cover the loss. This behavior reflects the idea that the availability of insurance can lead to riskier behavior since the individual stands to benefit financially from their actions without facing the true cost.

In contrast, the other scenarios do not illustrate moral hazard. A homeowner installing a security system demonstrates a proactive approach to risk management rather than taking undue risks. Similarly, a person removing valuable items before a storm is acting responsibly to protect their property, reflecting precaution rather than recklessness. Lastly, a business obtaining fire alarms represents a strategy to mitigate risk and safeguard their premises, staying within the boundaries of responsible risk management rather than engaging in behavior that leads to adverse outcomes due to insurance coverage.