Question

Consider the market for a health care service displayed in Figure, in which the government currently pays a per-unit subsidy M.If the government raises the value of M to a larger dollar amount per unit of service, what will happen to the out-of-pocket price paid by consumers, the price required to induce suppliers to provide services, and the number of services provided? Will the government's total expense for this health care service rise or fall?

Short answer

The out-of-pocket price paid by the consumers will reduce, the prices required to induce suppliers will remain the same and the number of services provided will remain the same.

The government's total expense for the health care service will rise.

Step-by-step solution

Step 1. Definition of Subsidy

The subsidy is the extra cost incurred by the government on any commodity to reduce the price for the consumers and incentivize the producers.

Step 2. The changes in the prices.

The out-of-pocket price paid by the consumers will reduce as the subsidy will increase the expense paid by the government, the prices required to induce suppliers will remain the same and the number of services provided will remain the same as the subsidy will not have a much greater impact on the quantity supplied.

The government's total expense for the health care service will rise as the increased subsidy will be a part of the government's budget and it would b added to the government's expenses.