Why does adverse selection occur in the health insurance market? ...

[crobinson2013]

Why does adverse selection occur in the health insurance market?
 
  What will be an ideal response?

Question 2

Refer to Figure 4-5. The figure above represents the market for pecans. Assume that this is a competitive market. If 8,000 pounds of pecans are sold
 
  A) marginal benefit is equal to marginal cost.
  B) the deadweight loss is equal to economic surplus.
  C) producer surplus equals consumer surplus.
  D) the marginal benefit of each of the 8,000 pounds of pecans equals 9.

[kjo;oj]

Answer to Question 1

Adverse selection occurs when one agent in a transaction knows about a hidden characteristic of a good and this information causes him or her to select in and out of markets. In health insurance markets, buyers have private information that sellers (health insurance companies) do not. Insurance companies would like to attract more low-risk individuals than high-risk individuals who are more likely to need expensive treatment. Since the company does not know how risky an individual is, it may charge higher premiums because it expects to attract many high-risk individuals, but then these higher premiums might discourage low-risk individuals from seeking health insurance. This leads to even higher premiums. In theory, insurance companies could end up charging such high premiums that no one except very high-risk people are insured. Therefore, adverse selection causes the market to shut down almost completely.

Answer to Question 2

A

[crobinson2013]

Thank you

[kjo;oj]

Happy to help you