Free Moral Hazard Essay Example

In the operation of business, there are situations that necessitate some actions of that could lead to losses to one party in a business. By taking some actions in the process of operation, a company could make losses that it could not be able to withstand and therefore, the government intervention is necessary. Moral hazard is a economic concept that can be used to explain this kind of situation and it happen when a trade party ventures in a risky operation with a hope that the other party in the transaction will bear the whole cost. It implies that one party takes the risk in a transaction knowing the costs thereof but sure not to take the burden on the venture (Bruce and Wong, 78). Moral hazards can be disadvantageous to a business and therefore, in some situations, the government intervenes to save one of the parties from the negative impacts.
Moral hazards happen when one of the parties in a transaction has advantage over the other parties and it entails one of them holding some details that the second party should know about a transaction. The situation indicates some form of ethical failures considering the fact that one party has total information about the responsibilities that are in a certain transactions but cannot take them. One of the parties bearing the information about the risky costs of venturing into transactions but fails to inform their partners and therefore, the second party strikes a deal that can lead it to make losses. In a situation of moral hazard, one party that lacks information is likely to make heavy losses but another party benefits from a transaction solely (Bruce and Wong, 81).
In order to protect a party from making losses in a transaction, the government can implement some policies for monitoring trade goods in the market. The process of monitoring the trade will ensure that all the parties get the awareness of the various aspects of the transaction and can ensure that they make no losses. On the other hand, a national government can develop institutions and license some others that can offer insurance services for traders in different transactions. With insurance companies in place, they will help trading parties to carry out the assessment of the benefits and losses in an organization that can lead them to make an appropriate decision in a transaction. In this kind of an environment, the government will ensure none of the partners in a transaction will be prone to losses that could happen because of lack of enough information (Bruce and Wong, 85-87).
In case of lack of information for one of the parties, moral hazard is a high likelihood to one of the parties in a transaction. The government of a region in which a transaction needs to implement policies that could help it to curb the losses a company or individual may incur in the process of a transaction. Of all the plans that a government can implement, insurance policies would be a good idea since the companies will have a means to assess the pros and cons of a venture they take part.
Bruce, Neil and Wong, Kar-Yiu. “Moral hazard, monitoring costs, and optimal government intervention” Journal of Risk and Uncertainty, 1996, Volume 12, Issue 1, pp 77-90