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What is the moral hazard

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Economists have long argued that, due to moral hazard problems, that "bailing out" firms such as banks (the S&L crisis), brokerage firms (Bear Stearns, Drexal Burnham...) and nations (Perhaps Greece in the future and the earlier Mexican Currency Crisis) may be bad idea.

2-a-i. Explain their difficulty with this concept of  "Bail Out" in accordance with moral hazard concerns. What is the moral hazard? What is one possible remedy for this moral hazard problem (what are the good and bad points of this remedy)?

2-a-ii.   Explain a problem "Bail Outs" create with adverse selection. What is adverse selection? What is one possible remedy for this adverse selection problem (what are the good and bad points of this remedy)?

Reference no: EM131338935

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