In the context of health insurance, how does the concept of 'safety in numbers' relate to consumer surplus and willingness to pay?

• A. It guarantees that every insured individual will receive more in benefits than they pay in premiums, maximizing consumer surplus.
• B. It allows insurers to pool risks, reducing individual premiums and increasing consumer surplus for those whose willingness to pay exceeds the market price.
• C. It leads to higher premiums for everyone, reducing consumer surplus and willingness to pay.
• D. It decreases the willingness to pay for insurance because individuals feel less responsible for their own health costs.

Answer: (B)

Verified step by step guidance

1. Understand the concept of 'safety in numbers' in health insurance: it refers to the idea that when many individuals pool their risks together, the insurer can predict overall costs more accurately and spread the risk across a large group.
2. Recognize that pooling risks allows insurers to reduce the uncertainty and variability of individual health costs, which in turn lowers the average premium charged to each insured person.
3. Connect this reduction in premiums to consumer surplus: consumer surplus is the difference between what consumers are willing to pay for insurance and what they actually pay (the premium). Lower premiums increase this surplus for consumers whose willingness to pay exceeds the market price.
4. Note that the willingness to pay for insurance depends on the perceived benefit and risk protection; by lowering premiums through risk pooling, more consumers find insurance affordable and valuable, thus increasing overall consumer surplus.
5. Conclude that 'safety in numbers' does not guarantee everyone receives more benefits than they pay, nor does it inherently increase premiums or reduce willingness to pay; instead, it enables risk pooling that lowers premiums and increases consumer surplus for many consumers.