The graph on the next page shows the supply and demand for health care in the nation. The demand curve reflects the marginal social benefit of health care while the supply curve reflects the marginal social cost.
a. What is the efficient amount of health care expenditures?
b. Suppose that under current arrangements health insurance reduces the price of health care to the population from an average of $100 per unit to $20 per unit. Show how third-party payments will affect the market for health care by affecting the quantity demanded and quantity supplied. Assuming that the price must increase $150 to accommodate the new quantity demanded, calculate the increase in expenditures for health care. Is efficiency now attained in the market?