ese being, moral hazard and adverse selection. Both have the potential to lead to the failure of the market system and therefore have direct policy implications.'The main function of an insurance contract is to reduce the risk faced by the person who buys it.' (Besley ,1988,151) If an insurance scheme is to be efficient it requires perfect information and risk minimisation on the part of the insurer and the insured. In the area of health this may not be the case due to the concept of Moral Hazard. Moral hazard occurs when the individuals incentive to maintain good health is deminished or the existence of the insurance causes the individual and the provider to over utilise health care services. Adverse selection occurs when the insurance provider is unable to determine the level of risk it faces due to imperfect information being provided by the insured individual. Both have the potential to cause the market in health care to fail. Because the cost of premiums rise, the 'ratio of bad risks to good risks amongst the insured will rise '( Le Grand, 1992,44) This leads to those individuals with a percieved lower risk abandoning insurance.The dismantling of the universal Medibank system of health insurance and the introduction of private health insurance resulted in many younger people opting out of insurance which produced stains upon the system.. The net result of this was a partial market failure which led to the development of severe inequities in access to health care. A feature of health care that may create problems for market allocation is that it has external' benefits or externalities (Le Grand 1992,46) Externalities are a major reason why goverments intervene in the market place. Externalities occur when a third party who is not involved in the decision to consume is affected by it, either as a cost or a benefit. Externalities have, to a large extent, been the major imperative of government health care reforms. Th...
