Third-Party Payer Markets
Exploration: How does the institution of co-payments affect total expenditures in a market?

This interactive graph depicts a third-party payer market. The person who receives the good is not the person paying the good. Examples of third party payer markets exist throughout the health care industry where many of us receive health care that is paid for by insurance companies. For example, when visiting the Doctor's Office, we pay a co-payment that is only part of the charge. Our insurance company, a third party, pays the rest. This interactive graph shows what happens in the supply-demand model when there is a third party payer and a co-payment. You can use your mouse to drag the green triangle up or down to adjust the co-payment—the amount paid by the consumer. You can also use your mouse to drag the demand curve out for an increase in demand and drag the demand curve in for a decrease in demand. You can press the Reset button to start over.

1. Press the Reset button to start in equilibrium with no co-payment. What is the equilibrium price and quantity? What are the total expenditures in the market? How much of this is paid by consumers? What area in the graph represents total consumer expenditures?
   See answer here
2. Now suppose a co-payment of $20.00. What is the quantity demanded at this price paid by consumers? What are total consumer expenditures equal to at this price? What area in the graph represents total consumer expenditures now?
   See answer here
3. What price will suppliers require to cover their costs of providing the quantity demanded by consumers when the co-payment is $20.00? What are the total expenditures in the market at this co-payment price? How much of this is paid by consumers and how much is paid by a third party. What areas in the graph represent these values?
   See answer here
4. What will happen to total market expenditures in a market where a co-payment is allowed?
   See answer here
5. Suppose there is an increase in the demand for this product and the co-payment remains at $20.00. What happens now?
   See answer here
6. Experiment on your own. Choose different co-payments by dragging the green triangle and observe what happens to the quantity demanded, the total expenditures, and the portion paid by consumers and third-party payers. Be sure to Reset the applet each time. What generalizations can you draw regarding the level of a co-payment and total expenditures in a third-party payer market as well as that portion paid by consumers and a third-party payer?
   See answer here