Market inefficiency. Show that the equilibrium contract in Question 2 is restricted inefficient: a subsidy on care, funded by a lump-sum tax, can increase the expected utility of insureds. [Hint:...

Market inefficiency. Show that the equilibrium contract in Question 2 is restricted inefficient: a subsidy on care, funded by a lump-sum tax, can increase the expected utility of insureds. [Hint: solve for the equilibrium contract as a function of s and T, evaluate the derivative of the equilibrium expected utility of the insured with respect to s at s  0, making plentiful use of the Envelope Theorem and remembering that sa  T.]