Income Disparity, Inequity Aversion and the Design of the Healthcare System

Abstract

An ex post social welfare function is used to evaluate alternative healthcare systems. If a society is averse to inequality and there is some income disparity, social welfare under private healthcare insurance is sometimes higher and sometimes lower than social welfare under public healthcare. However, a third system - public healthcare with the option to purchase supplemental healthcare insurance - is always socially preferred to private healthcare insurance. Moreover, it is either socially preferred to public healthcare or equivalent to it.