Ex Post Moral Hazard is a greater problem if elasticity of demand is relatively inelastic because people will buy a lot more care than necessary when faced with lower prices.
The Correct Answer and Explanation is:
Correct Answer:
False
Explanation:
Ex post moral hazard occurs after an insurance policy has been purchased and a loss has occurred—specifically, it refers to the increased consumption of healthcare services simply because someone else (typically an insurer) is paying for them. This is distinct from ex ante moral hazard, which involves changes in behavior before an event (such as being less careful because you have insurance coverage).
The claim in the question suggests that ex post moral hazard is a greater problem when demand is relatively inelastic. However, this is not accurate. The opposite is true.
Elasticity of demand refers to how sensitive the quantity demanded of a good is to changes in its price. If demand is inelastic, it means that consumers do not change their consumption significantly when the price changes. Conversely, if demand is elastic, consumers are more responsive to changes in price.
Ex post moral hazard is a greater problem when demand is elastic, not inelastic. Here’s why:
When healthcare services are price-sensitive (elastic demand), a decrease in out-of-pocket costs—such as when insurance pays for the majority of care—can lead to a significant increase in the quantity of healthcare consumed. People may seek more care, including low-value or unnecessary services, because the cost burden is shifted to the insurer.
On the other hand, if demand is inelastic, people do not increase their use of care substantially even if the price drops. For example, life-saving emergency services are typically inelastic—people will seek care regardless of the price. In these cases, even if insurance reduces the cost to the patient, the amount of care consumed doesn’t rise significantly.
Therefore, ex post moral hazard is more problematic when healthcare demand is elastic, because insured individuals are more likely to overconsume care in response to lower prices.