1)Explain the concepts of moral hazard and adverse selection.

2)Once a public good is produced, everyone:

A. can consume a different amount depending on their willingness to buy the good.

B. consumes the same amount and everyone's willingness to pay is the same.

C. consumes the same amount, but the willingness to pay will be different for different individuals.

D. can consume a different amount and pay different prices for the product

1)The terms moral hazard and adverse selection are both related to the risk-reward decision. A moral hazard occurs when an individual chooses a higher level of risk because s/he knows that the reward or loss will not fall back entirely on them. People who drive more carelessly because they have insurance would be an example.

Adverse selection is related to an individual making a choice without having all of the relevant information. In particular, adverse selection occurs when there is uneven, or asymmetric information, between two parties to a decision. A homeowner selling a house with a leaky roof that is unknown to the buyer would be an example.

2)The answer is C).

A public good is non-rivalry, meaning that one's consumption of it does not change the amount available to others. A public good is also non-excudable, thus no one could be denied access to the good. Hence, everyone will consume the same amount. However, each person could value the good differently, and thus might have different willingness to pay for the good.