Final: Moral Hazard

1. Price distortion and price sensitivity are? 2. Insured individuals bear (little or most) of cost of burgers 3. insured individuals demand for burgers (is or isn't) very price sensitive to prices 4. Is there moral hazard? How much social loss does it produce?

1. minimal 2. most 3. not very price sensitive 4. still more hazard, produces smaller social loss

1. In previous slide, what was point A? 2. What was point B 3. More burgers between Qu and Qi result in?

1. socially efficient equilibrium 2. outcome with cheeseburger 3. extra cheeseburger consumed result in more costs than worth note the extent of price sensitivity and extent of price distortion

1. Without insurance, individual consumes at point? 2. With full insurance, marginal costs of medical care fall to zero and he consumes at?

Qu QA

Jake loves cheeseburger. He is a heart patient. once with health insurance, cheeseburger means what (in terms of cost)?

Reduces cost of cheeseburger Can visit doc and take meds

varying price distortion and price sensitivity depends on?

elasticity of demand distance between Pu and Pi

Social loss happens due to

ex ante moral hazard.

A person visiting the doc 20 or more times, is hard to determine if it is illness or using free cost of visits. This is example of ex what?

ex post moral hazard

Jake loves cheeseburger. He is a heart patient. He has no insurance, a cheeseburger means what (in terms of cost)?

monetary price of cheeseburger increased risk of heart attack

a small price distortion will have how much effect on moral hazard, whether or not demand is elastic or inelastic

not much effect

What conlusions can be made as insurer increases level of coinsurance

Demand curve rotates back to uninsured demand curve. Coinsurance of 100% equals no insurance

If insurer institutes copay of Pc, what does this do to demand

Demand reduces from Qa (full insurance) to Qb.

Ex ante moral hazard

Behavior changes occur before an insured event happens and make event more likely. ex: not exercising, consuming cheeseburger, skipping flu vaccine

Moral hazard occurs if and only if what occurs

1. cost of risky or wasteful action is to a person is reduced 2. asymmetric info prevents insurer from pricing the action 3. person responds to price distortion by changing behavior, taking more risks or demanding more goods and services

1. Price distortion and price sensitivity are quite high. In this case, insured people bear (little or a lot) of cost of their heart attack treatments? 2. As they're quite price sensitive insured respond with (more or less) frequent trips to burger joint? 3. Does this result in (large or small) social loss?

1. little 2. more 3. large

The greater than angle between vertical line and demand curve shows?

More price sensitivity the person is and larger the social cost

Asymmetric info

Occurs between the insurer and insured party as insurer can't monitor insured party's behavior. ex ante

Ex post moral hazard

behavior changes occur after insured event happens and make recovering from the event more expensive -expensive drugs instead of genrics -knee replacement surgery

what function do coinsurance and copayment play

coinsurance and copayment are two insurance contracts that maintain positive marginal costs for the insured. Limit insurance coverage so they aren't full

How to limit moral hazard

cost sharing: coinsurance and copayment deductibles monitoring and gatekeeping

Coinsurance and copayments (decrease or increase) social loss at expense of (less or more) uncertainty face by consumers no longer fully insured

decrease more

Moral hazard

tendency for insurance against loss to reduce incentives to prevent or minimize the cost of loss get insured and drive reckless insured people take risks that uninsured wouldn't because they can get access to medical care moral hazard mis-allocates resources and increases medical expenditures