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Market for Lemons and Obamacare

Before I begin, I want to point out that I’m not even going to pretend that I know a large amount about politics or Obamacare, nor do I want this blog post to be seen in any way as biased towards one political view or another.

Having said that, I’m going to discuss an article that is from a conservative site, so I know that there is probably some type of bias in it, though hopefully this will not alter anyone’s views on this blog post. The article (I will post a link at the bottom) touches on a topic from today’s class, “a market for lemons,” and health insurance (specifically Obamacare). In particular, it discusses something called “adverse selection.” From what I’ve found, adverse selection is a phenomenon in which a worse “product” (in our case the worse product is “no insurance”, compared to the good product of “insurance”). This is due to the fact that we have a market for lemons, in which one party has more information that the other party.

What the article says about Obamacare is that because too few healthy, young individuals have not bought insurance, the price for Obamacare will probably have to be increased in order for the insurance companies to cover their costs for the sicker, older individuals. What this does in turn is cause even fewer healthy individuals to buy the insurance, because they will be driven away by the even higher prices for a service that they do not believe they need. Therefore, we have a spiral that could result in a complete failure of Obamacare. The article discusses this in more detail with numbers, and eventually comes to the conclusion that, if this continues, it will be less costly overall for a young, healthy person to NOT buy health insurance at all than to purchase even the lowest cost plan, even if this person did become sick or injured and had medical bills to pay.

Hopefully this post was interesting to anyone who read it. Even if you disagree with the politics behind this article and what I’ve written here, at least take away from it a good example of what can happen in a market for lemons, when there is “asymmetric information” between the parties involved.

 

http://finance.townhall.com/columnists/politicalcalculations/2014/02/16/obamacare-the-personal-finance-of-adverse-selection-n1795685/page/full

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