Question

Discuss how selection and moral hazard impact the demand for insurance (Who and how many people buy).

Answer 1

The moral hazard and adverse selection are the two problems in the insurance market. Under the moral hazard problem, the people who buy insurance will change their behavior because they feel they are more protected and lessen their effort to reduce the misfortune. The insured person will behave riskier. They are carelessly about their health. Without medical insurance people more careful about their health because of costly precautions. But after purchasing health insurance, they will ask to pay the amount to the insurers, and they are not bothered about the cost of health. This is the problem for hidden action.

On the same way, another problem for the health insurance market is adverse selection. It means sellers more valued their goods than buyers because the seller has more knowledge about the product. The adverse selection occurred when the demand for health insurance is positively related to the risk. It is because of some hidden information.