Lecture 6OutlineTypes of Government InterventionRecapSlide 5Slide 6Slide 7Slide 8Types of GoodsSlide 10Rational for Government InterventionSlide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Government Involvement in USGovernment Involvement in USSlide 24Slide 25Slide 26Government FailureSlide 28Slide 29Slide 30Slide 31Role of Public and Private SectorSlide 33Slide 34Slide 35Lecture 6Role of GovernmentOutline•Types of Government Intervention•Types of Goods•Reasons for Public Intervention•Government FailureTypes of Government Intervention1. Inform: or persuade consumers/providers/suppliers to act in a certain way.•Publicize health risks (smoking)•Disseminate information on disease patterns (avain flu), or risks of medical procedures.Recap•Last time talked about mkt failure•Markets are problematic in health care because1. Don’t provide goods efficiently2. Don’t provide good equitablyTypes of Government Intervention2. Regulation: determines how a private activity may be undertaken.•At extreme gov’t can prohibit goods or activities.•Setting standards for doctors and drug trails•regulate insurers to provide certain interventions.Types of Government Intervention3. Mandates: obliges someone to do something, and (usually, though not always) pay for it.–Mandated activity is different from regulation because the mandated activity must be performed. Producer can react to regulation by choosing not to undertake the activity.–Usually specified in laws–E.g. employers of a certain size must provide health insurance, children must be immunized at schoolsTypes of Government InterventionRegulation and mandates appeals to legislators• b/c tackles problems without incurring government spending.•Affects spending of those that are regulated e.g. two day hospital days after delivery.4. Finance: health care with public funds. –Delivery can still be public.Types of Government Intervention5. Provide: or deliver health services using publicly-owned facilities and civil service staff.•Usually publicly financed and provided•More typical of developing countries•Developed countries usually provide a lot of autonomy if publicly provided (crown corporations).6. Taxes/subsides on goods e.g. cigarettes•With diabetes increasing so quickly should certain foods be taxed more?Types of GoodsPublic Goods: 2 qualities–Non-rivalous someone’s consumption does not reduce the amount available for others to consume. •Control of disease vectors (malaria)•Food and water safety–Non-excludable consumer cannot be excluded from consuming the good either by having to pay or through some other mechanisms.–Classic example national defense.Types of GoodsMerit Goods: good that are thought to be good for someone regardless of the person’s own preferences.–Compulsory education.–Wearing seat belts or helmets on motor cycles.–Tobacco and drugs.•Mkt failure because don’t consume enough of it.Rational for Government Intervention•Government’s often try to correct market failures (market distortions).•Remember the theory of the second best, fixing the distortion won’t necessarily make people better off (may or may not). –Need to think about when government intervention may be appropriate.–Can sometimes be a value judgement.•In health care governments are not aiming for perfect competition because not achievable for much of health care. Instead use other mechanisms than a price mechanism to ration health care.Rational for Government Intervention1. Public Goods: •Market failure because too little of the good is produced in private markets. •Usually large number of individuals.•Individuals unlikely to cooperate to fund substantial amounts of public goods through voluntary contributions. •Free-riders: can’t exclude them from the benefits, but free-ride b/c an voluntary contribution has a negligible impact on availability.•Government takes responsibility for providing good.•E.g. control of disease vectors (malaria), clean air, food and water safety, information, medical research (some types), information, voluntary giving (redistribution)Rational for Government Intervention2. Externalities:•Goods that have third-part effects.•When a third party is affected by another person’s consumption or production of a good. And price mechanisms to compensate these people.•E.g. neighbors loud music, smoke, air pollution, contagious diseases (SARs, Bird Flu)•Problem is that externalities are not reflected in the price of a good. •Factories don’t pay extra because they made the air dirty (hopefully in the future they will).Rational for Government InterventionMC: Marginal Cost = Price – Supply CurvePriceHealth CareD: Demand curve or private marginal benefit curve.MEB: Marginal external benefitMSB: Marginal Social BenefitQmQoptCase of immunizationsEfficient point for societyRational for Government InterventionMCPriceHealth CareDMEBMSBQmQoptCase of immunizationsMC with subsidyPolicy Response: Subsidize price of good.Rational for Government Intervention•Are subsidies to producers passed onto consumers?–Depends on the slope of the demand and supply curves.P1P1-SP2S1S2 : after subsidyDPQPQConsumer and producer benefitsOnly consumer benefitsRational for Government Intervention•Policy Options for Externality:–For negative externalities (air pollution, dumping feces into water supplies)•Subsidy•Regulation and mandates (laws).•Public provision/finance of some goods–immunizations in developing countries have vaccination campaign days and weeks–disease surveillance•Charitable externality: can be sufficiently important to justify large social insurance programs.Rational for Government Intervention3. Incomplete Markets:–E.g. Insurance companies don’t want to insure you for pre-existing diseases (cancer, AIDS).–Can’t buy insurance.Policy Options:–Could use mandates that make insurance companies cover these people.–May need to subsidize drugs or care.–Could provide care.Rational for Government Intervention4. Merit Goods–Use argument everyone should have access to health care.–Why many developing countries have free access to medical care (even if can’t afford to provide it).–Why you see universal health care systems.Rational for Government Intervention5. Market Power•Monolopies, oligopolies etc.•Any industry where the supply or marginal cost curve is not flat (so are not price