Risk, Uncertainty and Moral Hazard

This paper gives precision o the meaning of the term "moral hazard". It then analyses the implications which the phenomenon of moral hazard has on the welfare effects of public insurance schemes and the present shortage of medical doctors and hospitals in the United States. I concludes that the existence of moral hazard does not necessarily invalidate the case for welfare increasing public provision of insurance as Pauly has claimed in his criticism of Arrow. Finally, the analysis explores the implications the phenomenon of moral hazard has for Knight's famous distinction between risk and uncertainty.