Ex post welfare under alternative health care systems

The government s rst-best policy its policy in the absence of active private insurers takes a very simple form: the social value of another unit of health care is equated to the social value of the consumption forgone when this unit is produced. [...] However, if the marginal cost of health care is increasing, the second-best policy pushes the social value of another unit of health care below the social value of the forgone consumption. [...] Since the rms are price-takers in both the input and output markets, the total income of the agents is equal to the market value of the produced goods. [...] A necessary condition for the maximization of W is that the government treat only the agents for whom the bene t the increase in the value of W per unit 7 of health care is greatest. [...] The social cost of a unit of health care is G0(M), the social value of the consumption lost when one more unit of health care is provided.