Understanding Moral Hazard in Healthcare Market

How does moral hazard impact the market for healthcare?

A. may exaggerate their losses and this inappropriately increases MSB B. may not take care of themselves and get sick and this increases MSC C. may use resources to the point where MSB D. may exaggerate their losses and the standard model cannot be used

Answer:

The correct answer is B. Moral hazard causes a deadweight loss in the market for healthcare because individuals may not take care of themselves and get sick, thereby increasing the marginal social cost (MSC) of healthcare.

When individuals have insurance coverage or other forms of healthcare protection, they may engage in riskier behaviors or neglect preventative measures, knowing that they will be covered for the costs of their healthcare needs. This behavior leads to an increase in healthcare utilization, raising the overall cost of providing healthcare services and creating a deadweight loss.

Moral hazard occurs when individuals alter their behavior due to reduced personal financial risk. In the context of healthcare, this can manifest as individuals not taking sufficient care of their health or engaging in risky behaviors because they know that their healthcare expenses will be covered. By not actively pursuing preventive measures or engaging in healthy practices, individuals increase the probability of getting sick or requiring expensive treatments. As a result, healthcare costs escalate, putting strain on resources and increasing the MSC. This deadweight loss arises because resources are inefficiently allocated to treat preventable illnesses rather than being used for more productive purposes.