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Chapter 5: Q. 5.4 (page 100)
Analyze how public spending programs such as Medicare and spending on public education affect consumption incentives.
They improve consumption incentives.
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Explain how market failures such as externalities might justify economic functions of the government.
Who provides the \(16 billion paid to Medicare's "1 percent" every year- alongside the additional \)74 billion in payments to the other 99 percent of the physicians who receive payments from Medicare?
A government offers to let a number of students at a public school transfer to a private school under two conditions: It will transmit to the private school the same per-pupil subsidy it provides the public school, and the private school will be required to admit the students at a below-market net tuition rate. Will the economic outcome be the same as the one that would have arisen if the government instead simply provided students with grants to cover the current market tuition rate at the private school? (Hint: Does it matter if schools receive payments directly from the government or from consumers?)
Discuss the central elements of theory of public choice
Scans of internal organs using magnetic resonance imaging (MRI) devices are often covered by subsidized health insurance programs such as Medicare. Consider the following table illustrating hypothetical quantities of individual MRI testing procedures demanded and supplied at various prices, and then answer the questions that follow.
| Price | Quantity Demanded | Quantity Supplied |
| \(100 | 100,000 | 40,000 |
| \)300 | 90,000 | 60,000 |
| \(500 | 80,000 | 80,000 |
| \)700 | 70,000 | 100,000 |
| \(900 | 60,000 | 120,000 |
(a) In the absence of a government-subsidized health plan, what is the equilibrium price of MRI tests? What is the amount of society’s total spending on MRI tests?
(b) Suppose that the government establishes a health plan guaranteeing that all qualified participants can purchase MRI tests at an effective price (that is, out-of-pocket cost) to the individual of \)100 per test. How many MRI tests will people consume?
(c) What is the per-unit price that induces producers to provide the amount of MRI tests demanded at the government-guaranteed price of $100? What is society’s total spending on MRI tests?
(d) Under the government’s coverage of MRI tests, what is the per-unit subsidy it provides? What is the total subsidy that the government pays to support MRI testing at its guaranteed price?
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