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The insurance market may fail from adverse selection. Adverse selection is caused by information asymmetry between buyer and seller before the transaction. Is completed. Potential buyers do not have the information to differentiate between the better quality goods from poorer quality ones. In the insurance market, healthier people may believe that insurance is not worth the cost and choose to drop out while less healthy people raise the cost of the  insurance due to the higher cost incurred. The higher price causes more healthy people to withdraw from the insurance market as they are worried about an unfair transaction. This diminishes the quality and volume of transactions in the markey. This  may eventually cause the insurance market to fail as only the unhealthiest people remain in the market and insurance companies become less willing to provide their services.

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What can the government do to solve this?

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What can the government do to solve this?

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Explain how the insurance market may fail

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Explain how the insurance market may fail

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Explain how co-payments can help to reduce the market failure problem in the healthcare market caused by moral hazard and adverse selection.

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Explain how co-payments can help to reduce the market failure problem in the healthcare market caused by moral hazard and adverse selection.

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What is the final outcome in the healthcare market? 

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What is the final outcome in the healthcare market? 

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Identify the problem of adverse selection in the healthcare market using Article 1

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Identify the problem of adverse selection in the healthcare market using Article 1

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Identify the problem of moral hazard in the healthcare market using Problem 1 

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Identify the problem of moral hazard in the healthcare market using Problem 1 

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Caleb, Keanne and Isaac

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Elsbeth & Abigail

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Heidi, Peishan, Sidney

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Only one person: Sean

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Keng Yang and Eliza

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Xi Ning, Sierra, Shue Wen

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Can there be any mandatory regulations to be done prior to signing up the healthcare insurance?

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Problem 2:

If customers differ in relevant
ways (such as when they have a chronic disease) and those
differences are known to them but not to insurers, the mix of people
who buy insurance may be especially expensive to insure.

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Insured consumers overconsume as their healthcare insurance is already paid for thus they try to make the most out of it. For example, going to the doctor when only experiencing minor symptoms. This reduces the number of doctors or hospital space available for the next consumer and when someone has a more serious illness or injury, they are not able to get help.

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Co-payments are a form of cost-sharing in healthcare where patients are required to pay a portion of the cost for medical services or treatments at the time of receiving care. Moral hazard refers to the tendency of individuals to over utilise healthcare services when they are shielded from the full cost of those services. They may be more likely to seek unnecessary or excessive treatments, leading to increased healthcare spending and inefficiencies in resource allocation. Co-payments act as a financial barrier, requiring patients to bear a portion of the cost of their healthcare services, and discouraging unnecessary utilisation by making individuals financially responsible for a portion of the expense. Adverse selection arises from information asymmetry between the buyer and seller before completing the transaction. The deliberate withholding of information led to certain parties naturally selecting themselves out of a market. This can lead to a disproportionate enrollment of individuals with higher healthcare risks and costs into insurance plans, resulting in an imbalance where insurers face higher costs than anticipated, which may result in increased premiums or reduced coverage options. Co-payments can help mitigate adverse selection by creating a price barrier for individuals with lower healthcare needs. This helps to balance the risk as healthier individuals who have a lower likelihood of requiring extensive care are less likely to get insurance, reducing the adverse selection problem. Hence, these result in an efficient healthcare market. It encourages cost-conscious behavior among patients, reducing unnecessary utilisation of services, and preventing the concentration of high-cost individuals within insurance plans.

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The healthcare market will fail due to adverse selection and will have a welfare loss. As people can choose whether to receive treatment or not, consumers will tend to choose to receive lower quality treatment which is cheaper. Higher quality goods will be squeezes out of the market which results in the market to consist of lower quality goods. The welfare of the producers and consumers will not be maximise and cause the market to be inefficient.

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Co payment reduces adverse selection
Thus welfare lost is reduces and market failure is cleared