Question

Consumers are far more likely to pay for dental services out-of-pocket than for hospital care. What implications does this fact have for the growth of total spending on dental service and hospital care? Why?

Answer 1

Implications will be that total spending on hospital care is likely to grow faster than total spending on dental
care because we don't pay the marginal cost of hospital care, and are therefore likely to overconsume it.

A price based on marginal costs is presumed to convey “price signals” that lead to the efficient allocation of resources.Marginal costs, being defined as the additional costs of the production of an additional service unit, are used.Marginal cost is the increase or decrease in total production cost if output is increased by one more unit. The formula to obtain the marginal cost is change in total costs / change in quantity. If the price you charge per unit is greater than the marginal cost of producing one more unit, then you should produce that unit.