Impact of substitution of third-party payment in demand and
Explanation of Solution
The insurance companies provide third-party insurance, and government provides out-of-pocket payments to the medical care to the consumers for their well-being. When government or insurance company pays for health care, it will result in increasing demand for the service. This in turn increases the price of medical service. One of the major reason for the increase in price is the inelastic supply of medical service. Because if the service becomes perfectly inelastic, the suppliers of medical service receive benefit from that and even the subsidy or payment benefit is received by the consumer. Besides this, the third-party payment will reduce the economization of people because the suppliers provide most value to the service and which in turn will attract the consumers, and they pay without being concerned about the price.
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