EC248 Lecture Notes - Lecture 9: Ex-Ante, Adverse Selection, Market Failure
Document Summary
Refers to the tendency of insurance coverage to change behaviour and thereby change the expected value of the loss. There are two types of moral hazard economists are concerned with: ex ante moral hazard. Insurance-induced changes in behaviour that alter the probability of an insured event occurring: more of a concern with respect to insurance on material possessions, ex post moral hazard. Insurance-induced changes in behaviour that alter the insured loss after the insured event occurs. From a societal perspective, insurance has two counteracting welfare effects: the social welfare gain of insurance, risk reduction for individuals through insurance, social welfare loss of increased utilization of health care. The design for optimal insurance coverage balances these two counteracting welfare effects of insurance. Supply-side approaches to combat moral hazard tend to target policies at providers in an attempt to ensure that only necessary, effective care is provided.
