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Chapter 5: Q. d (page 112)
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?
Public and government.
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Suppose that the current price of a tablet device is \(300 and that people are buying 1 million devices per year. The government decides to begin subsidizing the purchase of new tablet devices. The government believes that the appropriate price is \)260 per tablet, so the program offers to send people cash for the difference between \(260 and whatever the people pay for each tablet they buy.
(a) If no consumers change their tablet-buying behavior, how much will this program cost the taxpayers?
(b) Will the subsidy cause people to buy more, fewer, or the same number of tablets? Explain.
(c) Suppose that people end up buying 1.5 million tablets once the program is in place. If the market price of tablets does not change, how much will this program cost the taxpayers?
(d) Under the assumption that the program causes people to buy 1.5 million tablets and also causes the market price of tablets to rise to \)320, how much will this program cost the taxpayers?
Now draw a diagram of the market for oranges. Explain how the government policy you discussed in part (b) of Problem 5-2 is likely to affect the market price and equilibrium quantity in the orange market. In what sense do consumers of oranges now “pay” for dealing with the spillover costs of pesticide production?
Suppose that the U.S. government determines that cigarette smoking creates social costs not reflected in the current market price and equilibrium quantity of cigarettes. A study has recommended that the government can correct the externality effect of cigarette consumption by paying farmers not to plant tobacco used to manufacture cigarettes. It also recommends raising the funds to make these payments by increasing taxes on cigarettes. Assuming that the government is correct that cigarette smoking creates external costs, evaluate whether the study’s recommended policies might help correct this negative externality.
Based on your answer to Question 5-17, if Pennsylvania's government aims to correct the steel market's negative externality via an effluent fee, is the appropriate fee higher or lower now than steel producers have adopted the new technique? Why or why not?
After a government implements a voucher program, granting funds that families can spend at schools of their choice, numerous students in public schools switch to private schools. Parents’ and students’ valuations of the services provided at both private and public schools adjust to equality with
the true market price of educational services. Is anyone likely to lose out nonetheless? If so, who?
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