Use a supply and demand diagrams to show that a private health insurance market is inefficient...

Use a supply and demand diagrams to show that a private health insurance market is inefficient in the presence of positive externalities.

Expert Solution

From the following graph, it is observed that when private health insurance has positive externality, then it has price P and quantity Q that is higher than the socially optimal equilibrium when a subsidy is given to the insurer. Then, quantity becomes Q1 that is more than Q and price becomes P1 that is less than P. It shows that efficient equilibrium is achieved with subsidy and without it, market was inefficient.

Rahul Sunny answered 2 years ago

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