Question

The supervisor of the YMCA states that parents are supposed to pick up their children by 4 PM but often parents are late we average of eight late pick ups to help this supervisor decided to institute a fine of three dollars per child per incident next to the number of late pick ups more than doubled to 20 per week why

Answer 1

This incidence is a result of moral hazard problem. A moral hazard problem arises due to information asymmetry ,when the party having more information about this intended actions takes such an action ,which acts to the detriment of the other party(who has less information). The supervisor has imposed a fine of $3 per incidence of late pickup, without ascertaining which parents who are more prone to pickup their child late. while the supervisor intended to limit the late pickup problem by this action (and earning more money was not an intention), parents perceived this fine as an expense they were allowed to pay to allow themselves of a late pickup. Thus, the free charged by the supervisor made thee parents take riskier actions, by paying for the risk ($3).