Chapter_09_v2 - Part 3 Public Expenditure: Social Insurance...

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Part 3 – Public Expenditure: Social Insurance and Income Maintenance Chapter 9 – The Health Care Market 1. a. Concern with health care costs does not mean that health care is not “good.” Economists do not care about the cost of health care per se. Rather, the issue is whether there are distortions in the market that lead to more than an efficient amount being consumed. b. It makes a lot of difference how money is spent. One can create employment by hiring people to dig ditches and then fill them up, but this produces nothing useful in the way of goods and services. Thus, employment in the health care sector is not desirable in itself. It is desirable to the extent that it is associated with the production of an efficient quantity of health care services. 2. If insurance were provided to individuals living in hurricane zones, the cost of living in those areas would decrease, thereby causing more people to choose to live in these areas and making payouts from the insurance higher if a hurricane occurs. This is classic moral hazard, which is an increase in the behavior that makes the undesirable outcome more likely. 3. This situation can be explained by the concept of moral hazard. The traffic lights created dangerous behavior, like speeding up to make it through a light, which made accidents more likely. Removing the lights forced drivers to be more cautious at intersections to
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Chapter_09_v2 - Part 3 Public Expenditure: Social Insurance...

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