Investments in human capital require an upfront cost but provide long-term benefits. Human capital is much broader than just education and includes any investment that improves the quality of production. These decisions include things like moving across the country or improving one’s health. The US government uses some of its tax receipts to invest in healthcare for its citizens. This investment has resulted in increases in life expectancy, especially for those that have been treated at the National Institute of Health.
While doctors are likely to be focused only on saving lives, medical insurance companies may be focused on increasing the quantity of healthcare a person receives. In this brief scene, we consider whether it’s appropriate for insurance companies to charge without consent and whether doctors may be incentivized to do more than necessary to increase earnings.
Joey finds out that he hasn’t been working enough lately, so the Screen Actors Guild is canceling his insurance. He’s quick to point out the moral hazard involved in insurance because now he has to be more careful!
Later in the episode, he comes down with a hernia after working out. Since his insurance has lapsed, he doesn’t have enough money to go to the doctor to get it looked out. Luckily, Joey is able to find a part as “dying man” and he ends up getting his health insurance back.
Thanks to Isabel Ruiz for the clip suggestion!
When a loved one dies, and we are in a state of grief, we often aren’t making the most informed decisions. Funeral homes know this and use this fact to charge higher prices. They can do so because our price elasticity of demand for end life services is high. There are few reasons for this. First, there is not enough time to “shop around” for better pricing on the goods and services provided as a funeral is often expected to take place quickly after a person’s death. Second, there is high asymmetric information about exactly what is actually necessity and what is more a luxury (the clip pokes fun of this with the casket featuring WiFi). Last, there are no close substitutes for end of life services – you only have two options: burial or cremation. For these reasons, we are less sensitive to price when shopping for end of life services for our loved ones and will pay a higher prices consequently.’
Adam Ruins Everything is a half-hour informational comedy were host, Adam Conover, debunks popular myths. Each episode is divided into 3 segments with some common theme. In the Spring of 2018, James Tierney and I sat down to go through all three seasons of Adam Ruins Everything to pick out examples in each episode that could be used in an economics course. If you’re curious about the paper, you can read about it here.
Terry is debating with himself on whether to get a vasectomy after the birth of his two little girls. He goes in for the procedure, but while under anesthesia he confesses to Jake that he is conflicted. Terry doesn’t believe Jake, but Jake has tried to make it a point that he’s Terry’s friend and is looking out for him. Terry asks him to focus on his own body and points out that Jake’s poor diet is the reason why healthcare is so expensive for everyone else. At the end of the episode, Terry gifts Jake a box of carrots, but Jake doesn’t really appreciate it.
Moral hazard occurs when a party that is protected from risk behaves differently from the way it would behave if it were fully exposed to the risk. Here, the last line is a perfect example of moral hazard, when Aasif Mandvi says, “Hey man! You can get drunk and have a great time and it doesn’t matter ‘cuz you’ve got health insurance!” Now students can fall off of keg stands and get hurt but that’s ok, they have health insurance now!
Thanks to James Tierney for the clip and the description!
This clips includes a few different economics concepts rolled in to one. The overarching theme is that of consumer choice where Homer appears to experience diminishing returns while trying to eat a 16 pound steak. He’s competing against a previous eating contest winner, who dies at the end from eating too much steak.
In the middle of the clip, Marge asks Dr. Hibbert if that much steak is healthy and Dr. Hibbert exhibits a bit of the principle-agent problem where his interests now align with eating competitions because he owns a portion of the restaurant. The good doctor tells her not to worry because they have a new heimlich machine, which decreases their need to focus on choking hazards.
After Dee has a heart attack and finds out she doesn’t have health insurance, Mac and Charlie go on a quest to get a job that includes healthcare benefits. They decide to apply to a job together, but since they only care about the healthcare part of the job, they end up accepting a minimum wage job.
After Dee has a heart attack, she heads to the hospital only to find out that she doesn’t have insurance because her dad canceled the policy when they were younger. Mac and Charlie are confused that people have to pay to stay in a hospital because they think of it like a public good similar to police and fire protection, which is nonexcludable.
Frank shows up to get a full body health scan because he’s been having a bit too much fun. This line alone is a great clip for teaching moral hazard when it comes to healthcare.
Charlie and Mac discuss how crazy it is that Americans need to pay for healthcare and would only expect that from a communist dictator. Their confusion comes about because their friend, Dee, has a heart attack and then they realize that the could be injured at any moment.