Question

1) The reasons for government involvement in social insurance include all of the following EXCEPT:
a. a potential adverse selection problem stemming from asymmetric information.
b. a potential savings in decision-making and administrative costs.
c. the paternalistic belief that some individuals will not engage in necessary planning.
d. the adverse effect such involvement has on the distribution of income.

2) Suppose that among a group of uninsured people, the only ones who want to buy health insurance are the ones who happen to enjoy jumping out of perfectly good airplanes. This is an example of:
a. adverse selection.
b. rent seeking.
c. moral hazard.
d. X-inefficiency.

Answer 1

1. Option D.

• Government actively takes part in the social insurance programs for the betterment of the welfare of the society.
• They usually involve themselves bin order to solve the adverse selection problems and also to assist in decision making.
• They do not involve themselves due to the adverse effect issue on income distribution.

2. Option C.

• The above statement is an example of moral hazard.
• This is because people who jump from the plane think that they are covered under the insurance policy and can take the risk easily.