Suppose you decide each month how much of your disposable income to spend on hea

Question

Suppose you decide each month how much of your disposable income to spend on health insurance and on other goods. Suppose that both “health insurance” and “other goods” are normal goods. Each unit of health insurance costs $10, and your monthly income is $3000.

(5) The government gives everyone a voucher good for $500 of health insurance per month. [You can buy additional health insurance on top of that at the $10 price.]

(c) A government critic slams the new policy, saying, “Instead of a voucher, they should just give out $500 cash.” Give one reason why you agree, and one reason why you disagree. (State each reason in 3 lines or fewer)

Explanation / Answer

In economics, normal goods are any goods for which demand increases when income increases, and falls when income decreases but price remains constant, i.e. with a positive income elasticity of demand.

I agree with Critics statement as the Voucher will not increase any Cash flow in the hand of recipient and if needed, they might have to buy additional health insurance from Out of Pocket expenses. The demand will remain same as there is no increase in income.

I don’t agree with Critics statement as the extra $ 500 given by government will increase the Income of the individual. More income will lead to more demand in normal goods, which in turn will lead to increase in prices and inflation. So the government policy to give vouchers is justified.

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