EC248 Lecture Notes - Lecture 8: Risk Pool, Risk Premium, Loss Aversion
Document Summary
Lesson 8: the demand for health care insurance. Risk pooling: sharing risks between a large group in order to protect themselves from a specified risky event, how effective a risk pooling is depends on three factors, size of the risk pool. Independence of risks across members of the risk pool. Independence between having insurance the size of loss. Demand for insurance: at its core, the economic model of demand for insurance assumes, people know all possible outcomes, probability of a specific outcome, monetary loss of a specific outcome. Expected value and utility is the probability of event 1 occurring multiplied by their respective value or utility. A person can have one of three risk attitudes: risk averse, prefers a certain level of wealth over a risky alternative with the same expected value, risk loving, prefers a risky alternative, risk neutral. The actuarially fair premium is equal to the expected loss.
