Question

1. Consider 2 policies: A) The government requires everyone to buy a standard health insurance package that costs $5000; B) The government taxes everybody $5000 but cuts taxes by $5000 for everybody who buys the standard health insurance package.   Do these policies have different effects on the size of government? Explain why.

2. Show graphically and explain why Pareto optimality occurs at a commodity distribution bundle between 2 agents where the marginal rates of substitution between the goods for both agents are equal.

3. Is it feasible for a non-Pareto efficient commodity allocation to create greater societal welfare than does an alternate Pareto efficient commodity allocation? Explain why it is or isn’t. You might find it useful to employ graphical analysis in your answer.

4. Show graphically and explain why the private provision of a public good will not result in an allocatively efficient outcome. As part of your answer you must provide a full explanation of what allocative efficiency is and from where it derives.

5. Show graphically and explain why the private market provision of a good that carries with it a negative externality creates a societal welfare loss.

PLEASE ANSWER QUESTION NUMBER 2.