Question
Pat, Jamie, and Taylor and are three individuals who are identical in every relevant way except one: they differ in their health insurance coverage. All
Pat, Jamie, and Taylor and are three individuals who are identical in every relevant way except one: they differ in their health insurance coverage. All three have just been diagnosed with a fully treatable and non-life-threatening illness. Treatment costs $20, 000. Pats health insurance will cover 100% of these costs if Pat elects to be treated. Jamie has no health insurance: she have to pay $20, 000 out of pocket to get treated. Taylors insurer paid $20, 000 to her as soon as the diagnosis was made; she can freely choose whether to spend the $20, 000 on treatment or to pocket the money instead. In each of the following cases, would you conclude that health insurance causes moral hazard? Explain why. (a) Suppose you observe that Pat is getting treated, but Jamie does not. You do not know Taylors choice. (b) Suppose you observe that Pat is getting treated, but Taylor does not. You do not know Jamies choice.
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