Many economists point to moral hazard as the primary reason underlying rising he

Question

Many economists point to moral hazard as the primary reason underlying rising health care costs in the United States.

A) Explain the general argument behind moral hazard.

B) Explain the five ways in which moral hazards takes place (explain with graph if possible).

C) How does price elasticity of demand influence the moral hazard problem?

D) Explain how an insurer could reduce the scope of the moral hazard problem by introducing a consumer copayment.

E) What two considerations determine the optimal copayment rate.

Explanation / Answer

A. According to the information presented, the moral hazard is the primary reason behind rising health care costs in the United States due to the fact that people who feel themselves isolated from risks decide to have a different behavior than those who are exposed to risks, sending those financial costs to someone else. In this situation, people who have insurance policies tend to overuse health care services promoting as a consequence an increase in health care costs.

B. This moral hazard problem could be explained according to different situations, let's take a look:

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