The local government has decided that because children’s health has large external benefits, it will offer a subsidy to help families pay for visits to the pediatrician. However, the government isn’t sure at what level to set the subsidy. Figure 18P-5 shows the current demand curve for pediatricians’ visits (D1), and three alternative subsidies, represented by curves D2, D3, and D4.
a. Assume that the correct level of subsidy is D3. Compared to the efficient outcome, graph the loss in total surplus that would result from subsidies D2 and D4.
b. What is the socially optimal level of pediatrician visits?