Question

Prior to any health insurance, suppose that the societal cost of providing a doctor’s visit is a constant $100 co-pay. With insurance the visit is now $20. Suppose that the demand for visits can be expressed as P = 300 − 0.5Q

(a) Draw and label a graph representing the demand,supply,and social-marginal cost (and benefit) curves.

(b) Are there any inefficiencies present? Depict this on the graph and express the amount of the inefficiency.

(c) If there is any inefficiency, why does this occur? If not, why should we not be concerned about inefficiencies?

Answer 1

Given that,

Societal cost= $100

Cost with insurance= $20

given function: P=300-0.5Q

Using this demand function, by inserting the two given values of Price (P), we can calcluate the coordinate for Quantity demanded in order to plot a graph. Please find below the attached image for better representation:

Moving forward to the allocative efficiency, which can be easily understood as the production of the such quantity of the output; the quantity where the societal marginal benefit of another unit just equals the marginal cost.

Generally, the monopolies are inefficient since the monopolistic firm does not produce at this point that the demand equals marginal cost. Instead, they produce in such lesser quantities and sets their price much higher.

We are concerned about inefficiencies because monopolies are never tilted towards societal benefit but they are rather tilted towards marginalising their profit and taking undue benefits from their position.