A city municipality introduces a subsidized 'no-deductible' bicycle theft insurance policy for all residents. Shortly after the scheme is launched, the rate of bicycle thefts in the city rises dramatically because cyclists stop locking their bikes in public spaces.
This market outcome is a direct result of:
adverse selection, because high-risk cyclists who live in high-crime areas are the primary purchasers of the subsidized insurance.
moral hazard, because the transfer of risk to the insurer reduces the cyclists' incentive to take preventative security measures.
an information gap, because cyclists are unaware of the true statistical probability of bicycle theft in the city.
negative externalities, because the increased theft rate imposes spillover policing and insurance costs on the wider community.
