Do Consumers Purchase Too Much Health Insurance? The Role of Market Power in Health‐Care Markets

Several authors have suggested that consumers purchase too much health insurance in private markets. We readdress this issue within a model that combines excess health‐care demand due to health insurance with market power due to monopolistic production of health‐care services. We evaluate the market equilibrium in terms of consumer welfare and social welfare. The consumer welfare criterion suggests that in the market equilibrium consumers in fact purchase too much health insurance coverage. The social welfare criterion, in contrast, suggests that because profits of the health‐care industry are properly accounted for, consumers should purchase more insurance coverage than they choose to do in the market equilibrium.