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Perfect Competition and Surpluses

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Assume that the market for labor is perfectly competitive, and that authorities institute the following policy: All workers should have health insurance, and the employer should pay for 100% of each worker's insurance policy (assume that the cost of the policy is the same for every worker). Use graphical and intuitive analysis to evaluate the effects of this policy on the surpluses of both workers and employers. Do workers really benefit from this policy? If so, under what conditions? Explain.

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Solution Summary

The solution uses a graphical and intuitive analysis to evaluate the effects of the policy on the surpluses of both workers and employers.

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Since the employer has to pay for the workers' insurance policies, he would like to earn back this extra expenditure by selling his goods at a higher price. ...

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