When it comes to health insurance, either publically provided or private, they suffer from problems of moral hazard and adverse selection. Moral Hazard is best explained with an analogy. For instance, we believe that all the safety features on our cars such as airbags, seatbelts, brake paddle, etc., make us safe on the road. Therefore we believe that we are safe and are more likely to drive riskier because of the belief that there is a “safety net”. Imagine all the safety features being taken off, meaning, that there will be no seatbelt or any other things that make the car “safe”, instead, there will be a dagger pointing directly to the driver’s chest. The result of this experimen...
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...s typically do not insure the full amount of the item that you are insuring. For example, if an individual insures a car and it gets into an accident, the insurance company will not insure the full amount of the car. They also make the process of getting the money difficult so this might cause “higher risk” people to not make claims as often as they would. They would also take more precautions so that they will not have to go through the process of claiming money. Another way of controlling moral hazard within the people that obtain insurance is to penalize bad behaviour (Pettinger, 2014). This would involve the companies penalizing those individuals that engage in risky behaviours. For example, the government is able to bail out banks, however, they penalize those who are responsible for making the reckless behaviours that could have led them into the situation.
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