Question

Why do we say that ex post moral hazard is more of a problem if the demand for health care is more price elastic ( quantity is quite responsive to changes in price( that if is very inelastic? ( A graph is not required but might be useful.)

Answer 1

Demand is said to be elastic when there is a larger percentage change in the quantity demanded for a given percentage change in the price. This indicates that quantity demanded is highly responsive towards price changes. There is the moral hazard problem associated with health care in the sense that those who have health insurance, often become reckless about their health because the insurance company is paying for the health problems.

In case the demand for healthcare is more price elastic, slight fall in the price will increase the number of potential buyers of health insurance who might later exhibit carelessness because the insurance premium is relatively smaller. This implies that for elastic demand, there is a greater attraction of buyers who are more exposed to exhibit moral hazard. When the demand is inelastic, consumers will have to purchase insurance at a high premium so the problem of moral hazard is somehow undermined.