Consider two types of rules that might govern an otherwise unregulated health insurance market: (1) Insurance companies can price-discriminate against the sick and old; (2) insurance companies cannot price discriminate against the sick and old. Explain why, in equilibrium, insurance may be very expensive for the sick and old regardless of which case we find ourselves in.
What will be an ideal response?
In the first case, insurance companies would price-discriminate against the sick and old -- leaving the sick and old with high insurance rates. In the second case, insurance companies offer health insurance at a single zero profit price, but that might cause the young and healthy to not buy insurance -- which in turn means the zero profit price will have to rise, eventually leading to only the old and sick buying insurance at a high rate.
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