Lecture 6RecapOutlineTypes of Government InterventionSlide 5Slide 6Slide 7Slide 8Slide 9Types of GoodsSlide 11Rational for Government InterventionSlide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Government Involvement in USGovernment Involvement in USSlide 26Slide 27Slide 28Government FailureSlide 30Slide 31Slide 32Slide 33Role of Public and Private SectorSlide 35Slide 36Slide 37Slide 38Slide 39Lecture 6Chapter 19: Role of GovernmentRecapLast time talked about market failureMarkets are problematic in health care because1. Don’t provide goods efficiently2. Don’t provide good equitablyThis is why we see so much government intervention in health care.OutlineTypes of Government InterventionTypes of GoodsReasons for Public InterventionGovernment FailureTypes of Government Intervention1. Inform: or persuade consumers/providers/suppliers to act in a certain way.•Publicize health risks (smoking, diabetes)•Disseminate information on disease patterns (avain flu), or risks of medical procedures.Types of Government Intervention2. Regulation: determines how a private activity may be undertaken.At extreme government can prohibit goods or activities.Setting standards for doctors and drug trailsregulate 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 lawsE.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 private.Types of Government Intervention5. Provide: or deliver health services using publicly-owned facilities and civil service staff.Usually publicly financed and providedMore typical of developing countriesDeveloped countries usually provide a lot of autonomy if publicly provided (crown corporations).Types of Government Intervention6. Taxes/subsides on goods e.g. cigarettesWith diabetes increasing so quickly should certain foods be taxed more?Types of GoodsPublic Goods: 2 qualitiesNon-rivalous: someone’s consumption does not reduce the amount available for others to consume. Control of disease vectors (malaria)Food and water safetyNon-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: goods 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.Market failure because don’t consume enough of it.Rational for Government InterventionGovernment’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 judgment.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 a voluntary contribution has a negligible impact on availability.Rational for Government InterventionGovernment 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, the price mechanism doesn’t always take the externality into consideration. E.g. neighbors loud music, smoke, air pollution, contagious diseases (SARs, Bird Flu). Are you compensated for risk?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 InterventionAre subsidies to producers passed onto consumers?Depends on the slope of the demand and supply curves.P1P1-SP2S1S2 : after subsidyDPQPQConsumer and producer benefitsOnly consumer benefitsDS1S2 : after subsidyProducer SurplusConsumer SurplusP1P1-SQ1 QoptRational for Government InterventionPolicy Options for Externality:For negative/positive externalities (air pollution, dumping feces into water supplies)Tax/SubsidyRegulation and mandates (laws).Public provision or financing of some goodsimmunizations in developing countries have vaccination campaign days and weeksdisease surveillanceCharitable 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 GoodsUse argument everyone should have
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