pubsec-anstops6

pubsec-anstops6 - BRANDEIS UNIVERSITY Department of...

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BRANDEIS UNIVERSITY Department of Economics Economics 134 Mr. Coiner Public Sector Spring, 2010 Answers to Problem Set 6 1. Ch. 15, Question # 7. Contact lenses are not that expensive. It should not be hard for most people to self-insure (save up) to buy the lenses. The consumption smoothing benefits of medical insurance for this purpose are small. On the other hand, the moral hazard costs are fairly large. If contact lenses are cheap to the insured, people will not be as careful in using them and will have to replace them more often. Accidents and acute illnesses are the polar opposite. They create large expenses and are unpredictable, making it hard to self-insure against them. Here the consumption smoothing benefit of medical insurance is large, and moral hazard should not be much of a problem. Even if it is cheap for me to get my broken arm treated, I am unlikely to engage in behavior that would put me at risk of breaking an arm. Prescription drugs are somewhere in the middle. For someone who is chronically ill and needs a permanent prescription, they can be costly and difficult to self-insure against. In that situation, the consumption smoothing benefit of medical insurance is significant. Moral hazard for prescription drugs would vary from case to case, but is probably moderate. If drugs are cheap, people may be a little less careful with them, or they may seek continued prescriptions even when the continued use of the drug has only a small medical benefit (although, in this case, we would normally expect physicians to discontinue the prescription). This implies that insurance should offer almost full coverage for accidents and acute illnesses,
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This note was uploaded on 10/15/2011 for the course ECON 134 taught by Professor Coiner during the Spring '11 term at Brandeis.

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pubsec-anstops6 - BRANDEIS UNIVERSITY Department of...

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