Question

Draw an analogy between health insurance and taxi leasing in terms of moral hazard. In each case, highlight the price distortion, the behavior change due to price sensitivity, the information asymmetry, and the form of the social loss.

Answer 1

Moral hazard is defined when an individual reduces the risk cost by insuring himself or his any good.

Now, in case of both health insurance and taxi leasing the individual exposures more risk becuase he knows that he would not incur the risk cost or the total cost alone which leads to moral hazards.

And this leads to change in behaviour also. Becuase initially before any health insurance, an individual take care of himself as he know if he get any health related issues then he alone has to incurr any medical expenses. But after insurance, he exposures more risk because he has reduced the risk cost. This shows behaviour change.

Also, in such issues like moral hazards, there is information asymmetry. Either buyer have more information than that of seller or seller have information than buyer.

Due to moral hazards their occurs social loss becuase individual becomes more risk free.