compose a 1-2 page paper comparing and contrasting the views of Pauly (Conventio
ID: 1120937 • Letter: C
Question
compose a 1-2 page paper comparing and contrasting the views of Pauly (Conventional Theory) and Nyman (New Theory) in relation to the voluntary purchase of health insurance. The following questions must be addressed within your response: According to each theory, why do individuals purchase health insurance? How is each theory shaped by the concept of moral hazard? According to each theory, does the voluntary purchase of health insurance make consumers better off or worse off? For each theory, does going from being uninsured to being insured represent a movement along the demand curve for health insurance or a shift of the demand curve for health insurance?
Explanation / Answer
The theory of health insurance by Nyman opines that people prefer to buy health insurance just to avoid the chances of getting sick and paying a large amount for medical bill. So people give priority to buy health insurance to avoid risk. Nyman model tries to highlight how people spend money in health insurance just to keep themselves medically secured and avoid uncertainities in the future. But according to Nyman, while health insurance provides sicks the benefit of buying insurance, the healthy people are just lowering their income by spending money in health insurance premiums. Though both healthy and sick people buy health insurance, it is the sick people who derive the most benefit out of it and health insurance acts as an income trnsfer between the sick and healthy people. This leads to moral hazard because while one section of people are enjoying the advantages of health insurance, other section of people who fall in the category of healthy people are just transfering their income to those who really need it. He also opines that moral hazard leads to welfare decreasing to those people who are voluntarily investing their money on something, of which benefit they would never enjoy in their lifetime. And it has made low income categorised people to invest on expensive health care options which they would never have been able to afford. Thus It is just because of investment from every section of people in the society, health insurance has become affordable for the one who would never been able to afford the costliest medical treatments if get sick.
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