Question

1) Demand for medical care and moral hazard: Some argue that providing full insurance for routine mental health care will not significantly enhance social welfare and will lead to large social loss from moral hazard.

a) Using a graph and a few sentences, explain why providing full insurance for routine mental health care may lead to large social loss from moral hazard. Would you make the same argument for emergency mental health care? Explain in 1-2 sentences and show on a graph.

b) Suppose that instead of full insurance, the consumer had a mental health insurance plan that

covers routine mental health care with a co-insurance rate of 10%. Is this type of insurance plan likely to eliminate the social loss from moral hazard? Explain why using a graph and 1-2 sentences.

c) Using a graph and a few sentences, explain why providing full insurance for routine mental health care may not enhance welfare (e.g. increase a person’s total utility) much for a typical consumer. Would you make the same argument for emergency mental health care? Explain why or why not in 1-2 sentences.

Answer 1

Sol 1 :

(a)

• Providing Full insurance for routine mental health care may lead to large social loss from moral hazard as follows :

A person with a full insurance will likely to take expensive medical care facility because the price for the medical care facility for him is cheaper than before taking the medical facility. As , he will take the facility even it is not necessary for him , which we called as social loss. As, in the below mentioned graph without insurance he can use the medical care at QA but after having full insurance policy he will likely to take at QB. So , in this case social loss take in the form of extra money , labour , efforts.

• No , in case of emergency mental health care there will be no social loss. as, in emergency a person wants to be treated well then considering of taking expensive medical care services.

(b) Where , the consumer had a mental health insurance plan that covers routine mental health care with a co-insurance rate of 10%. yes, this type of insurance plan likely to eliminate the social loss from moral hazard but noot all social loss , it will decline only a small percentage of social loss.

coinsurance means a provision where only percentage of bill amount are paid to the insured by the insurer and rest of the amount is charged from the insured pocket.

as, in the mentioned graph before coinsurance policy there is social loss equal to B;' but after coinsurance policy the social loss moves towards that the actual prices. because now some of the price is going to be charged from the pockets of the insured.

In this case Social loss will be equal to BCQ.

(c)

• Providing full insurance in case of routine mental health care may not enhance welfare much for a typical consumer because under full insurance poicy , he wil prefer to make a rotuine checkup means increase in quantity of medical care . due to the law of diminishing marginal utility , with incraese in quantity marginal utility is going to diminish and so the total utility.

• No. in the emergency mental health care , typical consumer wants to cure from the disease as ssona s possible . so he will only take the possibel quantity of medical care instead of having routing health care.