Suppose that in the midst of a financial crisis, Mr Burns is forced to sell the SNPP to wealthy chocolate tycoons. The first thing the tycoons do is reverse Mr. Burns’ discriminatory policy against the obese. They eliminate the wage penalty associated with obesity but leave intact the pooled health insurance program, so Homer and Smithers still pay the same premium. a. Now do Homer’s jelly-eating, slothlike habits impose a negative externality on Smithers? Explain the nature of the negative externality. Is there any loss in net social welfare from this externality? Explain why or why not, and describe carefully any assumptions you need to answer this question. b. How might an adverse selection death spiral arise at the new SNPP?

Suppose that in the midst of a financial crisis, Mr Burns is forced to sell the SNPP to wealthy chocolate tycoons. The first thing the tycoons do is reverse Mr. Burns’ discriminatory policy against the obese. They eliminate the wage penalty associated with obesity but leave intact the pooled health insurance program, so Homer and Smithers still pay the same premium. a. Now do Homer’s jelly-eating, slothlike habits impose a negative externality on Smithers? Explain the nature of the negative externality. Is there any loss in net social welfare from this externality? Explain why or why not, and describe carefully any assumptions you need to answer this question. b. How might an adverse selection death spiral arise at the new SNPP?

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter17: Income, Poverty, And Health Care

Section: Chapter Questions

Problem 25P

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Suppose Homer and Smithers are in the same health insurance pool and they pay the same premium for their health insurance. Suppose further, that the SNPP discriminates against employees on the basis of body weight so that a negative wage penalty is associated with obesity. Finally, suppose Homer eschews exercise and loves jelly donuts much more than Smithers does. As a result, Homer also has much higher expected medical expenditures. Does Homer impose a negative externality on Smithers? Explain why or why not, and describe carefully any assumptions you need to answer this question.
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