Explain the Following Statement: "In Health Insurance Markets, Moral Hazard

question 3

Essay

Explain the following statement: "In health insurance markets, moral hazard implies individuals will consume too much health care, whereas adverse selection implies too little health care will be consumed."

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Definitions:

Weighted Average Cost of Capital

A calculation of a firm's cost of capital in which each category of capital is proportionately weighted, reflecting the expected cost of new capital funding.

Preferred Stock

A class of ownership in a corporation with a higher claim on assets and earnings than common stock, usually with dividends that are paid out before those to common stockholders.

Common Stock

A type of security that signifies ownership in a corporation, entitling the holder to a share of the company's assets and profits.

Pre-Tax Cost of Debt

The interest rate a company pays on its borrowings before taking into account any tax deductions.