Question

True or false. If the production of health care generates positive externalities, then the
welfare costs of moral hazard are smaller than those suggested by M. Pauly in his analysis. Explain.

Answer 1

TRUE

If the production of health care generates positive externalities, then welfare cost of moral hazard are smaller than those suggested by M.pauly

Additional consumption of health care services is labeled as a moral hazard; the costs associated with additional consumption of moral hazard can be covered by mitigating other consequences

Since conditions of maximum economic efficiency fail to hold in the market for medical care, moral hazard leads to increase in demand will raise welfare is a second-best theory.