Economic View – How an Insurance Mandate Could Leave Many Worse Off – NYTimes.com

The fiscal reality is that not all income groups can receive equal subsidies; as a family earns more, its subsidy would probably decrease, eventually falling to zero. But then we are taking money away from the poor as they climb into higher income categories. This is a disincentive to earn more, and the strength of the disincentive increases with our initial generosity.

via Economic View – How an Insurance Mandate Could Leave Many Worse Off – NYTimes.com.

This brief article by Tyler Cowen covers a lot of ground (it’s well worth the read). Insurance mandates force people to buy something they wouldn’t otherwise buy.

He doesn’t mention it, but it can also have two different negative impacts on the risky behavior of people. 1) It can encourage people to be more risky because they are now insured. 2) It can encourage people to stop being risk averse in some other area of their lives.

If I am concerned about the overall risk in my life, I may choose to insure some part of it while facing some other form of risk without insurance. If I am forced to insure a specific part of that risk, I may forego the cost of voluntarily insuring some other part of it.

For example, I face risk of health problems, and financial risks. I know that because I’m young, I can reduce my health risks by exercising, eating well and looking both ways before crossing the street, and I can implicitly insure my financial risks by living within my means and saving a larger portion of my income. If I’m forced to buy health insurance, I have less incentive to live healthily, but I’m also facing an increased total cost of insuring both risks (if that wasn’t the case, it would mean I found health insurance cheaper than living healthy, but then I would have already bought health insurance). Because I have a limited amount of time, energy and income, I will substitute quality of life spending for safety spending.

So not only will this mandate lower my effective income, it will likely lead me to be less healthy and take more risks in other areas of my life. The insurance mandate boils down to a politician substituting their idea of the most appropriate level and mix of insurance in my life. Now who will know better what level and mix is appropriate for me: me, or politicians who are already busy trying to micro-manage the world?

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