Question 1 Health insurance markets suffer from a large asymmetry of information that leads to adverse...

Question 1

Health insurance markets suffer from a large asymmetry of information that leads to adverse selection in the marketplace.

Describe the asymmetric information in the health insurance market. Who is harmed by it?

Solutions

Expert Solution

Asymmetric information, also known as "information failure," occurs when one party to an economic transaction has greater knowledge of the material than the other. This usually happens when the seller of a product or service has greater information than the buyer; however, it is also possible to have the reverse dynamics. Nearly all economic transactions involve asymmetries in the information.

In certain cases, asymmetric knowledge may have almost deceptive effects, such as adverse selection, which defines a situation in which an insurance provider experiences the possibility of significant loss due to a danger that was not known at the time of sale of a policy. For example, if the insured conceals the fact that he is a heavy smoker and regularly participates in risky leisure activities, this asymmetric flow of information represents an adverse selection and may increase insurance premiums for all consumers, causing the safe to withdraw.

Adverse selection arises when heterogeneous insurance buyers have information about the seller's own risk of not having it. When the retailer sells the policy at the average cost of insuring an entire company, then customers in that category who may demand less than the average cost frown on buying cover. Since the majority of the population will introduce above-average prices, the insurer will have to increase the price, which would cause more customers to refuse cover. In contrast, maximum coverage is sought only by consumers with the highest anticipated costs (as well as the most risk-averse ones).

Some economists claim the market fails because under asymmetric knowledge the market equilibrium (or lack thereof) is lower than the Balance under symmetric results. Sure enough, when it's true One supposes that information can be expensively obtained, all risks are Transferred and protected by insurance is complete; and in real markets, Coverage is incomplete, by contrast. But the disparity does not follow Means a business failure in the result.

Rahul Sunny answered 1 month ago

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