Economics 1st Edition by Dean Karlan,Jonathan Morduch

Exercise 12

The local government has decided that because children's health has large external benefits, it will offer a subsidy to help families pay for visits to the pediatrician. However, the government isn't sure at what level to set the subsidy. Figure 18P-5 shows the current demand curve for pediatricians' visits (D 1 ), and three alternative subsidies, represented by curves D 2 ,D 3 , and D 4.
a. Assume that the correct level of subsidy is D 3. Compared to the efficient outcome, graph the loss in total surplus that would result from subsidies D 2 and D 4.
b. What is the socially optimal level of pediatrician visits?