EC248 Lecture Notes - Lecture 8: Risk Pool, Moral Hazard, Risk Neutral
Document Summary
Ec 248 lesson 8 the demand for health care insurance. Most illness and injury is unpredictable, making health expenditures difficult to budget for. Mechanisms (such as insurance) reduce the financial risk associated with illness and injury can increase welfare. Risk is present when we are uncertain whether an event will happen. The amount of risk a person faces is determined by the probability of an event occurring and the potential size of the loss/gain associated with the event. For example, a person faces two lotteries: 95% chance of winning ,000, 5% chance of winning sh, 50% chance of winning ,000, 50% chance of winning sh. The greater risk is in the second lottery. Occurs when each member of a large group contributes a small amount (money/effort) to the. Pool in return for the promise that if a risky event happens to one of the members, money from the pool will be used to compensate the individual for the loss experienced.
