Chapter 20, Problem 1DQ

To determine

The condition under which one tries to avoid purchasing health insurance.

Explanation of Solution

There are many circumstances in which people avoid buying insurance. A few are mentioned below.

Social reason:

People are not aware of the features and the benefits of insurance. Hence, lack of awareness is the major reason behind people not opting for insurance.

Economical reason:

For every health insurance, there has to be a fixed premium that is paid by the people, either they get benefits in terms of reimbursement of treatment cost or not. The people are not in position to maintain such extra costs regularly because of their poor economical condition. So, they do not prefer to have health insurance.

Problem of adverse selection:

Insurance companies find it difficult to identify the people who need insurance the most. As a result, it charges an average amount from the people. Those who get ill rarely find the cost of the premium to be very high, so they avoid having such insurances.

Economics Concept Introduction

Introduction:

Insurance: Insurance refers to the contract between the person who is insured against the damages and the person who ensures to pay for the damages.

Adverse selection: It is the problem that arises due to imperfect information between the buyers and sellers. It leads to market failure. Consider an example of health insurance, where both needy and a normal person have to pay equal premium because the insurance companies fail to bifurcate the individuals in the market.