Question 1.

a) Explain in clear language the economic inefficiency associated with adverse selection.

b) The ACA (aka Obamacare) included an insurance mandate, which forces everyone to purchase insurance or face a penalty. Under what conditions does this mandate improve efficiency (increase total surplus)? What I mean by "under what conditions" is what must the demand,AC, and MC curves look like if the mandate improves efficiency relative to the world before the mandate.Draw a diagram in the style of Figure 1 in Einav and Finkelstein "Selection in Insurance Markets: Theory and Empirics in Pictures" such that the mandate would improve efficiency. For the purposes of this problem, assume there are no externalities--the only benefits are already included in the consumer demand curve and the only costs are already included in the insurer cost curves.

c) The ACA (aka Obamacare) included an insurance mandate, which forces everyone to purchase insurance or face a penalty. Under what conditions does this mandate not improve efficiency (not increase total surplus)? Draw a diagram in the style of Figure 1 in Einav and Finkelstein "Selection in Insurance Markets: Theory and Empirics in Pictures" that corresponds to this case. For the purposes of this problem, assume there are no externalities--the only benefits are already included in the consumer demand curve and the only costs are already included in the insurer cost curves.

Question 2.

a. In panel A, sketch a horizontal line for the competitive equilibrium price (recall the zero profit condition), anda vertical line for the competitive equilibrium quantity. Then indicate the consumer surplus generated at that price.

b. In panel B, sketch a horizontal line for the competitive equilibrium price (recall the zero profit condition), and a vertical linefor the competitive equilibrium quantity. Then indicate the producer surplus generated at that price. Mark areas of negative surplus clearly.

c. In panel C, sketch a horizontal line for the competitive equilibrium price (recall the zero profit condition), and a vertical linefor the competitive equilibrium quantity. Then indicate the total (net) surplus generated at that price.

Question 3.

Sketch a horizontal line for theefficient price (that is, the price that induces an efficient level of quantity), and a vertical linefor the efficient quantity. Then indicate the total (net) surplus at that price.

Question 4.

Sketch a vertical line for the competitive equilibrium quantity. Sketch another vertical line for the efficient quantity. Shade in the area corresponding to the inefficiency (that is, the loss of total surplus) that arises from the competitive equilibrium quantity relative to the efficient quantity.

Question 5.

The ACA created a new requirement that insurers cannot charge copays or deductibles for "annual wellness visits" (aka regular checkups, aka annual physicals). These now cost $0 in (almost) all US insurance plans.

a) Consider only people enrolled both before and after the implementation of the ACA.What does the theory of moral hazard tell is likely to happen to doctor visits among these people? Why?

b) Under what conditions would this policy improve efficiency?

c) Under what conditions would this policy not improve efficiency?