Here is the story that I'm telling.
A 17-year old female, Sandra, wants to buy a car. Sandra can't afford a new car so she's looking at used cars. Sandra hears her Law teacher talk about how minors can disaffirm a contract since they are an unreasonable person. Sandra finds a car, makes a down payment on the car, takes possession and drives the car for 20 days until the car breaks down. Sandra then wants her money back claiming that she was a minor when she bought the car. Sandra knew that she would be rescued by the law when she entered the contract. What economic principal of market failure am I trying to show?
a. Unjustly enriched
b. Adverse Selection
c. Intertemporal Choice
d. Moral Hazard
My answer is letter "d". Sandra's actions became reckless after she entered the transaction. Sandra knew that she would be saved by the law so she had no incentive to take care of the car. Her actions describe a situation in which she acted more recklessly than she would have if she could not be saved by the law. If Sandra would have chosen the seller of the car because the seller was a patsy, then I think a strong case could be made for adverse selection.
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