Question

SoMEONE

Consider how health insurance affects the quantity of health care services performed. Suppose that the typical medical procedure has a cost of $160, yet a person with health insurance pays only $40 out of pocket. Her insurance company pays the remaining $120. (The insurance company recoups the $120 through premiums, but the premium a person pays does not depend on how many procedures that person chooses to undergo.)
Consider the following demand curve in the market for medical care.
Use the black point (plus symbol) to indicate the quantity of procedures demanded if each procedure has a price of $160. Then use the grey point (star symbol) to indicate the quantity of procedures demanded if each procedure has a price of $40.
If the cost of each procedure to society is truly $160, and if individuals have health insurance as just described, the number of procedures performed will be than the number that would maximize total surplus.
Economists often blame the health insurance system for excessive use of medical care.
Given your analysis, the use of care might be viewed as excessive because consumers get procedures whose value is than the cost of producing them.

Answer 1

Health insurance can lead to increased demand for healthcare services because individuals face a lower out-of-pocket cost, leading to potential overuse and inefficient resource allocation when the societal cost exceeds the individual benefit.

Step-by-step explanation:

The question looks at how health insurance impacts the quantity of healthcare services people uses. In a scenario where a medical procedure costs $160, but a person with insurance only pays an out-of-pocket expense of $40, we’d expect to see a shift in the demand for healthcare. The insurance covers the remaining $120, which is offset by premiums, but those premiums do not change based on individual usage. Consequently, people might use more healthcare services than if they had to pay the full cost, leading to an over-consumption relative to the cost to society. This phenomenon is part of the moral hazard issue, where individuals with insurance consume more healthcare than they would without it, and this can lead to an inefficient allocation of resources, where the cost of producing healthcare services exceeds the value they provide to those individuals.