Assignment 6-10
beegirlie61
SanterreNeun_Chapter9-forassignment6.pptxChapter 9
Government,
Health,
and Medical Care
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Economic Reasons for Government Intervention
Public interest theory
Promotion of the general interests of society as a whole
Restoration efficiency & promote equity
Allocation of resources: produce where marginal social benefit (MSB) = marginal social cost (MSC)
Encourage competition, Provide consumer information, Reduce harmful externalities, Redistribute income in society
Enhanced efficiency and equity through laws and regulations
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Economic Reasons for Government Intervention
Special interest group theory
Amounts and types of legislation determined by the forces of supply and demand
Suppliers of legislation: vote-maximizing politicians
Buyers of legislation: wealth-maximizing special interest groups
Overall fiscal package / political exchanges
Beneficiaries: special interest groups
Costs fall disproportionately on the general public
Associated inefficiencies
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Economic Reasons for Government Intervention
Ohsfeldt and Gohmann (1992)
Presence of state regulations restricting AIDS-related health insurance underwriting practices
Is related to special interest group pressure
Underwriting regulations are more likely
States with high AIDS prevalence rate
Weak insurance industry
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Types of Government Intervention
Government
Provides public goods
Levies taxes
Corrects for externalities
Imposes regulations
Enforces antitrust laws
Operates public enterprises
Sponsors redistribution programs
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Public Goods
Public goods
Nonrivalry in consumption
One person can increase consumption of the good without diminishing the quantity available for others
Costly to exclude nonpaying individuals from receiving the benefits of a public good
Private firms are unwilling to produce public goods
Can be produced in either public or private sector
Necessary funding is collected through taxation
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Externalities
Occurrence
A market transaction affecting parties other than the buyers and sellers
Un-priced by-product of production or consumption
With externalities
Buyers and sellers do not fully internalize all the costs and benefits of the transaction
The product is usually under- or overproduced from a societal perspective
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Demand-Side Externalities
Cigarette smoking: negative externality
Negative externality: marginal social benefit (MSB) < marginal private benefit (MPB)
Smokers impose external costs
Pay less taxes and premiums into the system due to shorter life expectancy
Incur higher health care costs than nonsmokers
Nonsmokers die prematurely from both passive smoking and smoking-related fires
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Demand-Side Externalities
Cigarette smoking: negative externality
Supply (S): marginal private costs (MPC) and social costs (MSC)
Marginal costs of using various inputs to manufacture and retail cigarettes
All resource costs of production are internalized
Demand (D): marginal private benefit (MPB)
Greater than the MSB of cigarette consumption
Government intervention
Tax on cigarettes
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Figure 9.1 - External Costs of Cigarette Smoking
Packs of
cigarettes (Q)
Q0
Dollars
per
unit
D = MPB
S = MPC=MSC
MSC0
MSB
MSB0
Q1
An efficient allocation of resources occurs at Q1 because MSB = MSC. Left alone, the market tends to overproduce goods that generate negative externalities in consumption
The market equilibrium quantity is at Q0, where MPB = MPC. However, the market outcome is inefficient because at that point, MSC > MSB.
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Demand-Side Externalities
Rabies vaccination: positive externality
Positive externality: marginal social benefit (MSB) > marginal private benefit (MPB)
Vaccination creates external benefits
MSB reflects the MPB plus all external benefits
Prevents the spread of the infection to humans or other animals
Inefficient outcome: some individuals place very little value on the rabies vaccination
Too few rabies vaccinations
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Demand-Side Externalities
Rabies vaccination: positive externality
Supply curve (S)
Reflects the resource cost of providing the rabies vaccine
Demand (D): MPB = P
Lesser than the MSB of vaccination
Government intervention
Mandatory requirement
Fine can be charged on those who skips the process
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Figure 9.2 - External Benefits of Rabies Vaccines
Number of dogs vaccinated(Q)
Q0
Dollars
per
unit
D = MPB
S = MPC=MSC
MSC0
MSB0
Q1
MSB
An efficient allocation of resources occurs at Q1 because MSB = MSC. Left alone, the market tends to under-produce goods that generate positive externalities in consumption.
The market equilibrium output is at Q0, where MPB = MPC. However, the market outcome is inefficient because at that point, MSC < MSB.
0
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Supply-Side Externalities
Pollution created from a production process: negative externality
Demand curve (D): MPB and MSB
Supply curve (S)
Marginal private cost (MPC)
Amount it costs private industry to produce each additional unit of output
Marginal social cost of production (MSC)
Above MPC
Externality cost = MSC - MPC
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Supply-Side Externalities
Pollution created from a production process: negative externality
At Q0: MPC = MSB
MSC > MSB: inefficient
Goods over-produced
At Q1: MSC = MSB
MSC = MSB: efficient allocation
Government intervention
Environmental Protection Agency (EPA)
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Figure 9.3 - Negative Supply Externality
Quantity (Q)
Q0
Dollars
per
unit
D = MPB=MSB
S = MPC
Q1
MSC
An efficient allocation of resources occurs at Q1 because MSB = MSC. Left alone, the market tends to overproduce goods that generate negative externalities in production.
The market equilibrium is at Q0, MPB = MPC. However, the market outcome is inefficient because at the point, MSC > MSB.
0
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Externalities
Taxes and Subsidies: corrective instruments
Can be used to alter the price of a good and discourage either overconsumption or under-consumption
Market participants are forced to consider the true net social benefit of their actions
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Figure 9.5 - A Tax as a Corrective Instrument
Packs of
cigarettes (Q)
Q0
Dollars
per
unit
D = MPB
S0 = MPC=MSC
P0
MSB
P2
Q1
P1
T
Both consumers and producers share the tax burden. Consumers pay the portion P1 - P0 and producers pay P0 - P2. In general, the incidence of a tax depends on the relative demand and supply elasticities.
An unfettered market results in the outcome where MPB = MPC at Q0. Efficiency, however, exists at the point where MSB = MSC at Q1.
0
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Regulations
Government interventions
To correct a market imperfection
Which would otherwise cause a misallocation of society's resources
Control either the price, quantity, or quality of a product
Control the entry of new firms into the marketplace
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Price Ceiling: Maximum Price that can be Charged
Competitive market
Creates a shortage
May have unintended outcomes
Medical cost containment
Longer waiting lines
Non-price rationing
Reductions in the quality of care
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Figure 9. 7 - Effect of a Price Ceiling in a Competitive Industry
Quantity of
physician services (Q)
Q0
D
S
Dollars
per
unit
0
P0
PC
QS
QD
The graph represents a competitive market for physicians services in which a large number of insurers negotiate with physicians and determine the market price and output of P0 and Q0, respectively.
A price ceiling of PC results in a shortage in the short run equal to QD - QS.
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Price Ceiling: Maximum Price that can be Charged
Monopoly market
Without restrictions
Maximization profit by producing at Q0 (MR = MC) and charging a price of P0
Quantity is lower and price higher than in competitive markets
With a price ceiling (PC)
PC becomes the new fixed MR
Supply amount of services as per the demand
If PC < MC, shortage appears
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Figure 9.8
Quantity of
physician services (Q)
Q0
D
S
Dollars
per
unit
0
P0
PC
QC
MR
The graph represents a monopoly market for physicians services in which a large number of insurers negotiate with one large physician group and determine an initial market price and output of PO and QO, respectively.
A price ceiling of PC imposed by the government results in a greater supply quantity of QC
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Table 9.1 - The Efficiency Implications of a Price Ceiling For Two Interacting Conditions
| Type of Market Structure | |||
| Competitive | Monopoly | ||
| Type of Moral Hazard | Efficient | Welfare-Reducing (1) | Welfare-Improving (2) |
| Inefficient | Welfare-Improving (3) | Welfare-Reducing (4) |
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Regulations
Price
Impact depends on extensiveness of third party involvement
Can lead to shortage if the market is perfectly competitive
Quality
Directed at the structure of operation
Aimed at quality of employees
Raise costs of production
Reduce supply of medical services
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Figure 9.9 - Effect of Professional Licensure
Employment (N)
N0
D0
S0
Wage
rate
(W)
0
W0
N1
N2
S1
D1
W1
W0
If the demand shift exceeds the supply shift such that N2 exceeds N0, the occupational licensing reflects an efficient policy serving the public interest
Initial market equilibrium occurs at employment N0 and wage of W0.
The licensing requirement increases the human capital investment necessary to enter the occupation and thereby reduces supply from S0 to S1. Then, the higher wage of W1 creates an incentive for professionals to improve their job performance. This leads to a demand increase from D0 to D1.
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Antitrust Laws
Antitrust laws
Promotes competition among the firms within an industry
Prohibits firms from engaging in certain types of market practices that may inhibit efficiency
The Sherman Antitrust Act, 1890
clarified, reinforced, or extended by
Clayton Act of 1914
Federal Trade Commission Act of 1914
Cellar-Kefauver Amendment of 1950
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Price Fixing, Boycotting, Market Allocation
Anticompetitive (illegal) business practices
Price Fixing
Business rivals in an industry abide to a collusive agreement
Similar to monopoly: maximization of joint profits
Boycott
Agreement among competitors not to deal with a supplier or a customer
Market allocation
Competitors agree not to compete with one another in specific market areas: monopoly outcome
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B
C
Figure 9.10 - Williamson’s Merger Trade-off
Quantity of hospital services (Q)
Q0
D
Dollars per
unit
0
Q1
P1
AC1=MC1
h
AC0=S0
P0
d
a
b
k
The deadweight loss is the area C. The cost savings, represented by the area B, To determine whether if the merger provides net social benefits, areas B and C must be compared.
The graph represents the market for hospital services supposing a constant cost industry. The initial equilibrium output is Q0 and price is P0.
Now suppose two relatively large firms merge horizontally. The output falls to Q1 and price rises to P1. The merger also results in cost savings as average costs falls to AC1.
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Exclusive Dealing Contract
Vertical restrictions
Between manufacturers and distributors
Alternative to a vertical merger
Firms at different stages of production merge their operations
Can have anticompetitive or pro-competitive impacts
Can potentially harm consumers if the rival manufacturers are foreclosed
Can reduce the free-rider problem
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Tying Contract
Occurs when the seller of product A (tying product) will sell A only if the buyer also purchases product B (tied product)
Pro-competitive effects
Promote high quality
Reduce transaction costs
Anticompetitive effects
Price discrimination
Leveraging
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Most-Favored Nation Clause
A contract specifying a “price floor” or a “price ceiling”
Between health insurers and health care providers
Pro-competitive effects
A health insurer faces less risk of losing market share when in a contract
Anticompetitive effects
New small insurers can face high cost of entry
Price rigidity
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Antitrust Enforcement
Sherman Act
Mid 1970s: health industry under its purview
Less applicable in health care markets
Third-party payments, not-for-profit organizations, and excessive government regulations
Enforcement of antitrust laws
Could actually worsen the situation as cost- minimizing joint ventures and mergers are discouraged
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Public Enterprise
Government
Producing and distributing a specific health care service
County and city hospital services
Nursing homes and mental health facilities
Veterans Administration and military hospitals
Public enterprise
No profit incentive
No cost minimization
More equitable: equal access
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The Redistribution Function of Government
Redistribution of income
Taxing one group and subsidizing another with the tax revenue earned
Utility to both recipient and donor groups
Equitable redistribution scheme
Vertical equity: sufficiently progressive net tax system
Horizontal equity: Individuals with the same income should pay the same amount of net taxes
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Redistribution Schemes
Progressive
Net taxes as a fraction of income increase with income: Federal income tax system
Proportional
Net taxes as a fraction of income remain constant with respect to income: medicare tax
Regressive
Net taxes as a fraction of income fall with income: sales tax
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Supply-side Subsidy
Grant of money to a health care provider
Expands the production of a good
Lowers the marginal private cost of production
Downward-sloping market demand curve
Misallocation of resources: no positive externality
Distorts market prices
Provides a false signal that production is cheaper than it really is
Inequitable way of redistributing income
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Demand-side Subsidy
Subsidies to needy individuals
People must qualify by passing a means test
In-kind subsidy
Provides needy individuals with specific goods
Cash subsidy
Increase demand for various goods based on the recipient’s preferences
Funded by taxes
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Taxation
Welfare loss
Redistribution involves taxation
Some group must be taxed to finance the transfer payments made to the recipient group
Tax on a resource involved in production
Deadweight
Excess burden of a tax
Net benefit that is lost because of the tax
Depends on the elasticity of the supply curve with respect to the wage rate
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Figure 9.11 - Impact of an Income Tax in a Labor Market
Labor hours (L)
Wage
(W)
0
L0
Supply of
labor, S
w
a
L1
(1-t)w
e
b
After the tax, wage falls to (1 -t)W, workers commit only L1 hours to production. Labor surplus fall to the area [(1 - t)W]de and tax revenues equal the area Wbd [(1 - t)W]. Excess burden is the area bad.
Before the tax, laborers devote L0 hours to production and receive labor surplus of the area Wae at an hourly wage of W.
d
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Provisions of the Patient Protection and Affordable Care Act of 2010
Provisions of PPACA
Government subsidy programs
Public health services: actions taken by society
Community health centers (CHCs)
Tax initiatives: health care reform package
2.3 percent tax on first sale of a medical device
Indoor tanning services tax
Additional Medicare tax on high-wage workers
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