Question

Should government protect workers by capping premiums? Why or why not? What are the pros and cons of such a decision?

Answer 1

Economics is all about efficient allocation of resources. The market without any intervention other than market forces will allocate its resources efficiently that will result in a greater welfare for the society. It is necessary in this scenario that marginal cost as well as marginal benefits should be equal or total benefits to the society should be higher.
The workers buy insurance and for that they pay premium to the insurance companies. The premium is calculated on the basis of certain factors such as age, health status so that the actual risk should be assessed and that should be internalized in the premium paid.

If the government decide to intervene in the market and imposes a cap on the premium then it will create a distortion in the market in favor of the workers. The workers will have to pay a lower premium and that will encourage a larger number of workers to buy that insurance. The marginal benefits to the workers will be higher than the marginal cost of insurance premium.

However, this type of intervention will create a burden on the insurance companies as they will have to offer insurance product at a lower premium and it means their marginal cost will be higher. The companies will respond to the situation by excluding some benefits in the insurance or delaying the claim reimbursement procedure. Further, they could also turn away high risk clients.

Overall, the government intervention could distort the market and that will not be at its efficient level.