Answer to Question #99011 in Economics for Austin

Question

“If the production of health care generated positive externalities, the welfare costs of moral hazard would be smaller than those suggested by M. Pauly’s analysis”

Answer 1

Pauly's analysis of the welfare effects of moral hazard assumes that consumption of health care does not increase with income. When the effect of income transfers is removed, the price-related welfare loss is smaller than either the loss suggested by Pauly's analysis.

So, the statement is true.