Question

becaise health insurance causes moral hazard ,will the production necessarily be overinsured (in the sense athat a reduction jn insurance will improve welfare) ? are there Beneficial factors that bala nce against the cost of welfare loss

Answer 1

Health insurance causes moral hazard. This is because when the health is insured then the steps of the person to take preventive measures diminishes and it creates the problem of moral hazard in the economy. In this case, the production will necessarily be overinsured. And a reduction in the level of insurance will force people to take preventive measures. This increase in the preventive measures taken by people reduces the problem of moral hazard in the economy and thus reduction in insurance will improve welfare in the economy.

Some of the beneficial factors that balance against the cost of welfare loss include increased care and preventive measures taken by people towards their health and this increases the overall welfare and total surplus in the economy. It also leads to positive externality in the economy and thus reduction of the cost of welfare loss in the economy.