This section examines the impact of health insurance on health care demand. Economists commonly examine the efficient allocation of resources, which occurs when the incremental cost of bringing the resources to market (marginal cost) equals the valuation in the market to those who buy the resources (marginal benefit). If the marginal benefit is greater (less) than the marginal cost, one could improve society’s welfare by allocating more (fewer) resources to the sector or individual, and less (more) resources to other sectors. Consider Figure 8-5, which shows the marginal cost of care at P0 and the demand for care by a consumer under alternative conditions of insurance. If this consumer is not insured, then the optimal choice of health care is Q0 units. The price (including travel time, parking, and the cost of bringing the service to market) reflects the cost to society of bringing the entire package to the market. Based on the consumer’s (and the physician’s) preferences, the marginal benefit, as described through the demand curve, equals the marginal cost. In economic terminology, this is an efficient allocation.
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