Moral hazard is a relevant cost of producing insurance; it is not different from the cost that arises from the tendency of men to shirk when their employer is not watching them. And, just as man’s preference for shirking and leisure are costs of production that must be economized, so moral hazard must be economized in shifting and reducing risk. . . . The moral hazard problem is no different than the problem posed by any cost. Some iron ore is left unearthed because it is too costly to bring to the surface. But we do not claim ore mining is inefficient merely because mining is not “complete.” Some risks are left uninsured because the cost of moral hazard is too great and this may mean that self-insurance is economic.
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