Should thin people pay less health insurance?
In this controversial article, called Should thin people pay less insurance, the issue on whether the amount of health insurance people have to pay should be based on whether or not they are obese. The suggestion is that obese people should pay more insurance to motivate people to stay thin and healthy, ultimately decreasing the costs for everyone. The situation with the health insurance in Switzerland can be considered a market failure. When a market is unregulated it fails if there is a misallocation of resources towards a good or service. If we assume that the main reason for obesity in Switzerland is in effect of the fast food industry, then obesity would be a negative externality of the consumption of fast food. Fast food is a demerit good which is a good that is considered unhealthy or damaging in some way. A negative externality of consumption is something that adversely affects a third party, which had no participation in the market transaction, when consumed by individuals. In this case, thin people are suffering because of the eating habits of obese people. The negative effects of obese people are for example that they “take” money from thin people since everyone pays tax to the government for health insurance, but the obese people tend to have more health issues than thin people so they are indirectly using the thin people’s money.
Because of the negative externality of the consumption of fast food, the marginal social benefits is less than the marginal private benefit since the private utility is reduced due to the negative utility suffered by the thin, healthy people. The obese people enjoy the private benefits of consuming fast food, but by doing that they are creating external costs for other people. Since the fast food industry is a free market, consumers will maximize their private benefit by consuming at the point where marginal social cost is equal to marginal private benefit. They are of course oblivious of the negative externalities they are causing other people and will therefore over-consume fast food by consuming it at Q1 at the price of P1. Because the marginal social benefit is less than the marginal private benefit, there is a loss of total welfare for society, illustrated as the turquoise triangle on the graph above. The socially optimal level of consumption would be where marginal social benefit is equal to marginal social cost, where the level of output is Qso and the price is Pso. However, the resources are being over-allocated towards the fast food industry, which is one of the reasons for obesity.
The solution to obesity offered in the article may seem clever, but is in fact quite faulty in some aspects. As stated in the article, there are “people with a low BMI who are much more apt to get illnesses than those with a slightly higher-than-normal BMI but are still active”. This is only one reason why basing the insurance cost on BMI would not be a good idea.
One way of the government to get rid of negative externalities of consumption is to make it illegal to consume that product. However, this would be impossible to do when talking about the fast food industry since there would be a huge loss of unemployment if all fast-food restaurants were shut down. Instead, the government could take on a milder solution by imposing taxes on food that is unhealthy. This would cause the supply curve to shift to the left so that the consumption is reduced to the socially optimal level of output Qso and the price would go up to P2 and there would be no dead weight loss. The burden of the tax would be shared between consumers and producers. Not only would the tax reduce the consumption to the socially optimal level, which would in effect reduce obesity, but it would also create revenue for the government that could be used to correct the negative externality of consuming unhealthy food. The revenue could for example be used to fund campaigns and generate negative advertisement to inform people of the health risks of eating unhealthy food, which would in effect reduce the demand for fast food and hence increase the health of people.
