Author Question: Define moral hazard and adverse selection in the context of health insurance markets. Make sure to ... (Read 129 times)

nelaaney · **on:** Jul 1, 2018

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?

Question 2

Can the median voter model help explain why third parties have generally not been successful in the United States? Explain why or why not.

What will be an ideal response?

pallen55 · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

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.

Answer to Question 2

Yes, the median voter can help explain why third parties have generally not been successful in the United States. Under a majority rule system where all possible outcomes can be placed along a one-dimensional continuum, candidates must converge on the median voter if they want to win election to public office. An introduction of a third party, almost by definition, will leave two parties on one side of the median. These two parties will split the votes on that side of the median and ensuring that the party on the other side of the median will win, making three party systems unviable in the long run.