Question

Explain two ways that medical markets fail. For each provide one way the government could correct for market failure.

[Note: Medical markets include health care and health insurance markets].

Answer 1

The two ways that medical market fail are as follows:

1.Asymmetric Information:

It means that buyer and seller posses different information. That is information Asymmetry between individuals purchasing health insurance and the insurance company.

This Asymmetry Information leads to Adverse Selection and Moral hazard.

Adverse Selection:-

It is refers to a situation where buyer and sellers of an insurance products posses different information. In health insurance it happens when sicker people or those who present a higher risk to the insurer, by health insurance while healthier people don't buy it.

Moral hazard:-

It is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incure the cost. In case of medical market people are sometimes careless about their health because of the false confidence on insurance. In short, the possibility of being in sick increase due to the careless behavior of people who took medical insurance.

Measures taken by the government to correct market failure are as follows :-

1. Monopoly power can be controlled by the government by using anti-monopoly laws and restrictive trade practices legislaton. Anti-monopoly laws allows for joint development of policy forms. The act doesn't exempt insurers from state anti-trust laws, which explicitly prohibit insurers from conspiring to fix prices or otherwise restrict competition.

Also restrictive trade helps to reduce unfair competition,preventing unfair price discrimination and fixing prices equal to competitive prices etc.