Question: In 2004, Congress adopted a Medicare prescriptivism drug benefit which would, in effect, subsidize the purchase of drugs by the elderly. Opponents of the new subsidy argued that it would only result in higher prices for prescription drugs, with little benefit to the elderly. Under what conditions is this view likely to be correct? Do you think that these conditions are realistic?

(Note: Although the prescription drug program is very complicated, for purposes of this problem, simply model the benefit as an ad valorem subsidy.)