Question

1. It is argued that the production of healthcare generates externalities.

a. Provide and explain two examples of externalities that might be the result of producing healthcare.

b. If this argument is true, would a private market underproduce or overproduce healthcare? Explain.

c. Explain your answer and support it with a diagram. (Can be a drawing or computer generated)

*Please explain and support answers and provide a graph or chart*

Answer 1

a)Two examples of positive externality in healthcare are :

1) a person getting vaccination reduces the chances of other person to get infected by disease as you no longer can become the carrier of that disease .

2) The amount of medical research undertaken in healthcare by private sector . Research beyond providing benefit to the its owner has great benefit for the advancement of community

b) The above two are example of positive externality , so private market would underproduce these as social cost , which is less than the private cost is not taken into account while making the output decision .

c )

In the diagram , AB is the marginal benefit curve which intersects the MPC (marginal private cost )curve at point E such that OQ1 amount of healthcare is produced by the private sector . But since this is a good with positive externality social cost is less than the MPC and lies below the MPC curve and intersects the marginal benefit curve at point F such that socially optimal output OQ* is produced . Private sector would underproduce the good as OQ1 < OQ* .