After the fiasco with the Pcorian National Insurance Program (see Exercise 15), a Pcorian senator proposes a new policy that will go to a referendum of voters in the next election. Below is the text of the referendum.

Proposition 99: All Pcorians will submit to be genetically tested to see if they are frail or robust. If they are frail, they will receive a Frailness Compensation Payment of §1. Compensation payments will be funded through a tax that will be divided equally between all Pcorians, robust and frail.

You can assume that the genetic test costs nothing and is perfect at distinguishing frail and robust people. Under current law, genetic testing for the purposes of insurance contract underwriting is strictly illegal in Pcoria.

a. Assume that all Pcorians will vote to maximize their own utility, and that their utility is totally determined by their healthy-state and sick-state incomes. Which Pcorians will vote for the proposition?

b. Explain how Proposition 99 can be thought of as a Coasian transfer.What property rights are being sold in this situation, and by whom?

c. A privacy watchdog group called Anonymity sues to prevent the genetic testing from taking place. They claim that Proposition 99 harms frail Pcorians. Explain why they are wrong if utility is totally a function of income. Explain also why they might be right if utility is not determined wholly by income.

Exercise 15

Imagine policymakers in the fictional nation of Pcoria are trying to create a Pcorian National Insurance Program (PNIP) that will bring full insurance to all the citizens of Pcoria.

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Q B E UF H Figure 9.21. A Rothschild- Stiglitz diagram of the Pcorian insurance market.