Moral hazard: I take more chances that I might suffer a loss if I know the loss will be covered by insurance (or by some gubmnt programme). Here is a great example, courtesy of Professor Brian Ferguson at A Canadian Econoview:
Brian goes on to discuss a re-insurance plan that would require Florida taxpayers to create a fund to cover the re-insurance costs for serious hurricane-loss years.''I didn't have shutters until two years ago,'' Sen. [Bill Posey, a Republican from Rockledge who leads the Florida state Senate's Banking and Insurance Committee] said. ``I would say that's what I have insurance for. But those days are over.'' [quoted from the Miami Herald]For teaching purposes, I've always had trouble coming up with a really satisfactory illustration of moral hazard - the notion that the fact of having insurance against a certain type of loss might cause you to take less care to avoid that loss. Since I've started taking an interest in the weather in the Miami area, examples have ceased to be a problem.
Critics say that this approach could turn hurricane insurance into a tax increase. On the other hand, if you look at long term data on hurricane paths across Florida, you'd be hard pressed to say that there was any part of the state that was free of the risk of a catastrophic year. This proposal essentially spreads the risk across the entire population...It's an interesting concept, but perhaps it should be funded via property taxes instead of sales taxes.