Question

Sometimes moral hazard are efficient and socially beneficial. Give an example.

Answer 1

Moral hazard occurs when the consequences of the one's action is to be faced by the others. Though, on specific occasions it is socially beneficial and efficient. One example of it is, the bank gives micro finance to the farmers to buy cattle and or seeds to pursue their agricultural activities. Bank does it while knowing their there are risks as cattle may die or crops can suffer from the adverse weather condition and farmers will not be able to repay the loans. But, banks give micro loans to the farmers and take the risk, if not repaid, then it creates NPA and to be faced by the investors and depositors of the bank. Though it is socially beneficial because farmers get the necessary support in their agricultural activities and grow. It also provides necessary supply in the market and import of food items are restricted. It benefits the economy. Hence, in the given case, moral hazard is good for the society.