Demand functions, co-payment levels and welfare loss

The moral hazard associated with health insurance is twofold that which occurs ex ante, which consists in failing to prevent health problems because he or she knows that he or she is protected in the event of falling ill, and expost moral hazard, which is what occurs when rational consumers consume quantities that are greater than the optimum once they fall ill, because the marginal cost for the co-insured patient is lower than the marginal cost of production. 

This welfare loss implies inefficiency. Moral hazard gives rise to an inefficient reallocation of consumption, channelling it towards pharmaceuticals and away from other goods and services, both health care and others, which are not covered by insurance. Preventive services - sport, nutrition - become underused. 

The market supply function grows with respect to prices. Therefore, if the co-payment rate is raised from level (2) to level (1) the point of equilibrium shifts from B to A. Not only does consumption drop, from Q1 to Q0, but so does the price, from P1 to PQ. This reaction, which has been detected 

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Figure 7.1 Demand functions, co-payment levels and welfare loss...

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