Question

The Affordable Care Act (“Obamacare”) became law in 2010. Before then, not everyone capable of paying for comprehensive health insurance chose to do so. With some exceptions, after the law took effect, almost everyone who could pay for comprehensive health insurance did so. There were more people with health insurance after the law than before the law. Assume that the value to US society of one more person having health insurance is greater than the value the individual herself or himself believes she or he receives. This is because as more people have health insurance, individuals with potentially contagious conditions obtain medical help that stops the spread of those diseases to others. With these facts, show by supply and demand curves how the Affordable Care Act (“Obamacare”) might have increased social welfare.

Answer 1

We use the chart below, which is a standard demand supply graph, with price on vertical axis and quantity on horizontal axis. Blue line is the supply curve and the orange line is the original demand curve (without Obamacare). The social welfare (sum of consumers' and producers' surplus) is the area of the triangle inscribed by the orange line, the blue line and the vertical axis. With Obamacare, more people opt for health insurance, and hence the demand curve shifts rightwards and the grey line is the new demand curve. In this situation, the revised social welfare is the area of the triangle inscribed by the grey line, the blue line and the vertical axis. We can see clearly that social welfare has increased as a result of Obamacare (with more people option for health insurance.)