Health Economics And Policy Questions - 2412 Words

Health Economics and Policy Coursework Question 2 SN: 13026885 a) w=  £62,500 U= √w 50% chance of medical problem Costs of  £4,900 We can derive this individual’s expected wealth if we multiply the probability of each outcome with the associated costs. E(w) = 0.5 *  £62,500 + 0.5 * ( £62,500 -  £4,900) E(w) = 0.5 *  £62,500 + 0.5 *  £57,600 E(w) =  £60,050 To find out what level of utility will this individual’s expected wealth yield, we simply have to put the value of the E(w) in the utility equation. We know U= √w, so in our case - U(E(w)) = √(E(w)) ïÆ' ¨U(E(w)) = √60,050 ïÆ' ¨ U(E(w)) ≈ 245.051 To compute this individual s expected utility, we follow the exact same procedure as in point i), but this time for utility. So, we first†¦show more content†¦Not only will he be willing to purchase insurance, but he may also want to pay above the actuarially fair price, just to avoid additional expenses in case of sickness. The original risky gamble (in the absence of insurance) would leave him with an expected utility of 245, as shown in point iii) - this is the minimum utility this individual is willing to go to. That is, he will be willing to pay an amount of money that will leave him with a certain utility equal to the expected utility of the original gamble – 245. This uti lity is associated with a wealth of 2452 =  £60,025. So the maximum amount he is willing to pay for insurance is  £62,500 -  £60,025 =  £2,475 . Anything above this price would leave him with a certain utility lower than the expected one. This is illustrated in the graph, by the red arrow. b) Moral Hazard: Moral hazard is one of the market failures that occurs mostly in insurance markets. When consumers purchase insurance, and therefore, do not pay for the full price of health care – health care becomes relatively cheaper for them. Thus, consumers demand more health care than they would do in the absence of insurance – a phenomena regarded as moral hazard. It only occurs under the assumption that the demand for some types of health care is elastic – and therefore responsive to price changes. To illustrate this situation better – we use the following example. An individual A faces a 20% probability that he/she will have a car accident which