What is a moral hazard and how does it affect health care? Use an example to illustrate your point.

What will be an ideal response?

Moral hazard occurs when parties to a transaction behave differently than they otherwise would because they believe they won’t have to pay the full costs of their actions. In health insurance, this results from the gap between paying a fixed premium for health care and the costs of the care itself. If insurance covers the full cost of the care, patients have no incentive to economize because their costs (the insurance premium) will not change regardless of how much health care they use. Moreover, many insurance systems pay medical providers for each procedure, giving providers an incentive to oversupply procedures just as the patient has an incentive to overuse them. The obvious results are excessive medical procedures and rising costs. Governments intervene in health care in part to attempt to limit the effects of the moral hazard inherent in an insurance system.