Question

In: Economics

Indicate whether True, False, or Uncertain. Then provide a brief statement indicating WHY true or false,...

Indicate whether True, False, or Uncertain. Then provide a brief statement indicating WHY true or false, or if the statement is ambiguous, what would need to be altered to the statement to make it clearly true or false.

a) Publicly provided insurance may crowd out the purchases of those who would pay for private insurance.

b) The existence of moral hazard provides an argument for both market failure and government failure in insurance markets.

c) If there were no free-riding, the level of public goods provided by the government will be optimal for every individual.

Solutions

Expert Solution

a)True

Public health insurance can completely crowd out the private health insurance market.A public health insurance is funded by compulsory contribution and this does not allow for private health insurance.When public insurance is introduced, some people may drop private coverage to take the public one.

b)False

Moral hazard occurs when both parties do no have complete information about one another.Moral hazard is situation in which one party that gets involved in a risky situation ,knows that the cost of the risk will be borne by the other party.So, a party protected from risk will act in a different manner than a party without protection.Moral hazard is usually applicable in insurance industry.Insurance companies encourage risk taking by paying for the losses.The safety net created by the government create moral hazards that involve more risk taking and increases the need for more government control.

c)True

Free rider problem takes place when a person benefits from public good but do not make payments in order to cover the cost of production .The government uses cost and benefit analysis to find whether a public good should be provided. As long as marginal benefit is greater than marginal cost, a public good should be provided .The optimal quantity of public good occurs when MB=MC.So without free riding the level of public good will be optimal for every individual .

Rahul Sunny answered 2 years ago
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