Principles of economy by tim taylor 3rd ed 9 What is the pro

Principles of economy by tim taylor 3rd ed

9. What is the problem of moral hazard?

11. Define deductibles, copayments, and coinsurance.

13. What is the key difference between a fee-for-service health care system and a system based on health maintenance organizations?

15.How might adverse selection make it difficult for an insurance market to operate?

Solution

Moral hazard is the direct result of adverse selection. It is a problem of hidden action associated with asymmetric information. Here buyer has more information than seller. For example we can say demand curve is downwards sloping, ceteris peribus, for person X. Say at c1 cost he drives car at 80km/hr. When he fills premium for his car due to insurance he will have more tendency to be reckless and take less precaution, may be he drive fast as due to insurance his recklesness rose which is subject to reduced average cost. If such people in the midst of insurance buyer rises company will have more probability to face loss or stop selling insurance. Thus to stop this company may charge higher premium/different premium for different age and so on-so fourth.