Define moral hazard and adverse selection in the context of health insurance markets. Make sure to discuss why they are problems for health insurance markets
What will be an ideal response?
Moral hazard is when an insured individual has some control over the events that trigger a payment from the insurance company. This is a problem for insurance companies because it drives up costs as the very act of getting insurance causes individuals to engage in more risk-taking (or engage in less risk prevention). Adverse selection occurs when those most likely to make insurance claims buy insurance while those who are least likely to make claims remain uninsured. If insurance companies do not have sufficient information about the likelihood of individuals making claims in the future they cannot charge them appropriate premiums. If the premiums are too high, those who are high risks will still purchase because to them it is a good deal while those who are low-risk will be discouraged from purchasing insurance by high prices. Thus adverse selection can drive up the cost of health insurance and greatly reduce the number of people who want to buy insurance.
You might also like to view...
M1
A) is the sum of currency plus traveler's checks. B) is the narrowest definition of the money supply. C) includes credit cards. D) includes small time deposits.
A perfectly competitive firm should continue to expand output until
A. total revenue exceeds total costs. B. total revenue exceeds variable costs. C. marginal revenue equals marginal costs. D. average revenue equals variable costs.
In 1997–1998, which one of the following countries experienced a sharp depreciation of its currency?
a. Argentina b. Brazil c. Thailand d. Italy
The theory of comparative advantage suggests that trade should happen
a. between economies with small differences in opportunity costs of production. b. between economies with large differences in opportunity costs of production. c. between economies with large differences in specialization. d. between economies with small differences in specialization.