Suppose the equilibrium price for an average hospital stay in the absence of insurance is $10,000. At that price, 1000 people are hospitalized each year. Now suppose an insurer offers a policy to lower the out of pocket price of a stay to $100, and at that price, 1200 people are hospitalized.
Is the demand for hospital care elastic or inelastic?
How much moral hazard results from this type of insurance IF the supply curve is flat, that is, if horizontal at P = $10,000 per stay, regardless of how many?
The demand for hospital care is elastic because when the cost is reduced more people get hospitalized because health care insurance becomes affordable.
The moral hazard that would result if the insurance still cost $10000 per stay is that many people would die because there will not be able to seek the in-affordable health insurance hence most of them will not get hospitalized