00:01
Okay, so here we have a problem where a person, elaine, knows that her family has had significant medical problems in the past and so she decides to buy health insurance.
00:08
On the other hand, her friend jerry decides not to do so because his family has been healthier historically.
00:14
So before we do anything else, you kind of want to figure out what the issue actually is over here with the situation, right? why is it an issue that one person buys health insurance whereas somebody else doesn't? well, elaine is buying health insurance because she has some information that the insurance provider doesn't, which is that she is more likely to get sick.
00:31
And this is an example of information asymmetry, which i'm just going to write down really quickly, because it's pretty important, and it's also the scope of this problem.
00:40
And information asymmetry is generally a broader example of market failure.
00:44
And why is this bad? well, because health insurance only really works from everyone, whether they're more likely to get sick or not, buy into it.
00:50
And so insurance companies aren't crippled with large claims all the time from the people who buy it.
00:54
If just sick people bought health insurance, the cost of doing so would be very high for everybody.
01:00
Now that we know what the problem is, let's see if any of our answers here fit the case.
01:03
The moral hazard...