CU-Boulder ECON 4999 - Equity, Efficiency and Need (31 pages)

Previewing pages 1, 2, 14, 15, 30, 31 of 31 page document View the full content.
View Full Document

Equity, Efficiency and Need



Previewing pages 1, 2, 14, 15, 30, 31 of actual document.

View the full content.
View Full Document
View Full Document

Equity, Efficiency and Need

69 views


Pages:
31
School:
University of Colorado at Boulder
Course:
Econ 4999 -
Documents
Unformatted text preview:

Equity Efficiency and Need Why Are We Concerned Efficiency questions in health care sector arise because costs are high Equity questions arise because many people are uninsured or under insured Why Are We Concerned To really understand these concerns we need to 1 Know the definition of efficiency 2 The assumptions behind efficiency 3 Role of equity We are looking at issues in Public and Welfare Economics Outline Pareto efficiency Definition Edge worth box First fundamental theorem of welfare Second fundamental theorem of welfare Assumptions behind the competitive equilibrium Theory of the second best Equity Definition Pareto Efficiency Definition 1 An economically efficient optimal outcome in society is one under which it is impossible to make someone better off without making someone worse off 2 An efficient economy is one that has exhausted all means of mutual gains trade Edgeworth Box Is a graphical tool used to understand what this definition of efficiency means rest of notes done on chalk board First Fundamental Theorem of Welfare Economics This theorem says That an competitive equilibrium is Pareto efficient Great so as long as we have a competitive market our markets left all to themselves will be efficient economists mean Pareto efficient invisible hand solution First Fundamental Theorem of Welfare Economics But Is the health care market competitive Would a competitive market solution be equitable or would there be a lot of people left with no health care Second Fundamental Theorem of Welfare Economics Things are not so bleak Theorem states that given an appropriate endowment any Pareto efficient outcome can in principle be achieved This means that for any given endowment we can redistribute the endowment to get to the efficient outcome we want Back to chalk board How To Redistribute Should we subsidize certain services i e health care We can but it is not consistent with Pareto efficiency Why well to get to a Pareto efficient point we had to find a tangency between both people s indifference curve When everyone faces the same prices this will happen If they face different prices there will not be a tangency point i e there will be an inefficient outcome How To Redistribute Income transfers are a superior way to redistribute because doesn t change prices How do tax cuts reallocate resources What if it is a percent of income i e how taxation works Who pays less and who gets less redistributed back How To Redistribute Some policy makers hesitate to make largescale income redistribution because of incentives argument used in US more than other places Transferring wealth away for one group may provide a disincentive to work and giving money to another group may provide a disincentive to work assumes we are only stimulated by money Forgets some people can t work How To Redistribute If you are rich millionaire and someone takes 40 of that away will you say that is it I won t work to be a millionaire anymore It you are just below the poverty line and you know if you make more you will be taxed a lot more well then maybe you won t want to work as hard how much should we be concerned about this Could it make you work harder Competitive Model Assumptions 1 Free entry and exit of firms No barriers to entry 2 Perfect information of firms on consumers You know the price of all doctors visits in Boulder and the quality of each doctor and know what product you need 3 A homogenous product All doctors visits are the same 4 Lots of buyers and sellers out there so firms and consumers are price takers perfect competition No one has market power Competitive Model Assumptions 5 Consumers maximize their utility 6 Firms maximize profits 7 There are no significant externalities Externality occurs if we receive benefits or are harmed by the actions of others e g vaccinations Competitive Model Assumptions Do they hold for health care 1 2 3 4 Barriers to entry licensure laws price controls facility construction is expensive Lots of buyers and seller Not lots of hospitals in a town so some degree of market power Firms max profits There is more than profit motivation out there university hospitals often looking for prestige There are not for profit hospitals No uncertainty Lots of uncertainty in this market This is why we have insurance markets This distorts prices so we are no longer efficient Often prices are negotiated between supplier and consumer so price is not determine by the Competitive Model Assumptions Do they hold for health care 5 Perfect information There is not perfect information we don t know prices often No externalities 6 i e vaccinations viruses Theory of the Second Best Q1 So should we try to adhere to as many of the assumptions as possible for competitive markets Q2 Does removing a distortion of competitive markets make competitive markets work better Answer Not necessarily Theory of the Second Best tell us why Theory of the Second Best Say we have more than one departure from competitive market more than one assumption does not hold Call this departure a distortion Now there is a policy that tries to correct on of these distortions Theory of the Second Best says that such a correction may not improve welfare i e we can t assume welfare will be improved or that we get any closer to a competitive market Theory of the Second Best Classic Example Classic Example Polluting Monopolist Suppose we have a monopolist who is in an industry where they make a lot of pollution due to the process of how the good is made Monopolist is a departure from perfect competition assumption Only one firm in the market not many Polluter pollution is a negative externality Monopoly prices are higher than under perfect competition and monopolists produce less than would be produced under perfect competition They can set prices because have market power Theory of the Second Best Classic Example Now suppose we introduce more firms so the market is not a monopolistic anymore but competitive price takers Well if we do that output will increase and prices go down but the amount of pollution will also increase which could be a big problem So we made one problem better prices but another problem worse pollution Theory of the Second Best Health Example Health example licensure laws Create a monopoly At same time there is imperfect information in the market about quality of doctors If get rid of licensure laws more doctors can practice we may solve the monopoly problem But there may be unqualified doctors and you


View Full Document

Access the best Study Guides, Lecture Notes and Practice Exams

Loading Unlocking...
Login

Join to view Equity, Efficiency and Need and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Equity, Efficiency and Need and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?