Dworkin’s insurance plans Notes for October 3

Main points

We talked about the insurance plans in Dworkin’s article. Here’s how we got there.

The test for equality is the envy test: would anyone want to exchange their basket of resources with anyone else? Even after the auction, the distribution of goods will fail the envy test. Some people will have less than others for reasons other than their ambitions and the opportunity cost of satisfying their tastes. This is because some people have health problems that others don’t and some have talents that are in greater demand than those that others have. Soon, those who are disabled or cannot command good wages will envy others. So Dworkin proposes hypothetical insurance markets to solve the problem. With insurance, people can compare baskets of resources and insurance against risk of having a handicap or of being underemployed. If the insurance markets work, these baskets can meet the envy test.

Details, details

Professor Brown scored some points. First, she objected to a phrase on p. 293 about declining a particular kind of risk. As economists see it, you decline a risk of X’s happening if you have an insurance policy that leaves you indifferent between X’s happening and X’s not happening. For instance, the payout from my home insurance policy could be so large that I’m indifferent between my house burning down or not. But, she said, there is no parallel for many health problems. No amount of money would leave me indifferent between going blind or not. Makes sense to me!

She also pointed out that Dworkin doesn’t really have an argument for progressive tax rates. Dworkin argues that people would agree to a graduated premium for underemployment insurance: the premium goes up with their wealth. They would do this because of the declining marginal utility of wealth. As Prof. Brown notes, that would happen under a flat rate: the rich would pay (absolutely) more than the less rich.

Things left unsaid

Why is it important for a society to meet the envy test? Everything depends on that, but it’s never argued for.

How do these hypothetical insurance plans work? When are we supposed to imagine people making decisions about how much insurance they want to buy?

This page was written by Michael Green for Freedom, Markets, & Well-being, PPE 160, Fall 2012. It was posted October 3, 2012.
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