Question: If prices for medical care in private markets are considered to be ?too high', the Government might choose either to (a) regulate, by fixing prices below the equilibrium price, or (b) subsidise the consumers' use of these services. Demonstrate the effect of each approach on price and the quantity demanded and supplied.
Answer :
(a) Because of the high prices for medical care in private sector, the government wants consumers use these services at larger quantities, but consumers are not able or they do not want to pay for larger quantities of health care, at this price level. In an attempt to increase the amount of medical care used by its citizens, the Government is considering imposing an effective price ceiling on medical care suppliers that do business within the country limits. The following diagram, explain the effects of such a policy on the market for medical care, explicitly stating what will happen to demand, supply, equilibrium price and equilibrium quantity exchanged.
As we can observe from the diagram, at the vertical axis are showed the prices for medical care and at the horizontal axis is showed the quantity. Initially, the combination of the price and the quantity that balances the market is (P ,Q ). So we can say that the P clears the market for medical care. P also called equilibrium price, and it is the price at which the quantity demanded equals the quantity supplied. Correspondingly, Q is the equilibrium quantity, and it is the quantity of medical care that consumers want to buy and suppliers wish to supply. We also observe that point E is the market equilibrium. The effect of price ceiling is that the initially price is decreased at a lower price P of medical care.
By fixing the pric ...