Utility Income Risk Neutral Risk Averse Risk Loving Exam 3 Notes/Guide Last pages contain ALL information from review session Obesity - Obesity “inferior good” - Do nothing if obese internalize costs, therefore sin tax is not economically justified - Men lose more lifetime years than women from obesity - Whites lose more life years than blacks - Blacks have lifetime gains from being overweight (not to be confused with obese) - Obesity not a specific bad externality - Obese are incurring their own costs - Economists aim to internalize the additional cost - Private markets: Obesity is not a negative externality. Obese and thin are not risk pooled - Employer and labor markets favor thin job candidates over obese - Obese earn less wages, even with higher aptitudes and marital status - Illegal for employers to pay differing premiums based on risk - Thin paying more than the actuarial fair price, obese paying less than actuarial fair price - Employers exact a weight differential transferring wages from obese to thin (obese earn less, thin earn more) - Not considered negative externality in employer based health care - Obese don’t live as long, pay more in to social security yet do not live as long to collect - Pigouvian tax possibly solves negative externality, yet obese do not pose one - No basis for sin tax, since you cannot consider the obese as irrational - Adult obesity, no strong case for a “fat tax” Chapter 6- Demand for Medical Insurance - Insurance for risk-averse, Reduce variability in income- (XY): Risk neutral, must be linear - √ (Square root) Risk Averse, u=√y - Xn Risk Loving, u=Y2 Portuguese Drug Decriminalization - No criminal sanctions, yet administrative sanctions are possible - Depenalization – decision to not prosecute, change in practice - Cost savings- less costs associated with trying people in courts - UN Conventions- member of the United Nations are prohibited from cultivation, manufacturing, sale, and possession of illicit drugs (obviously not entirely true, since Portugal is part of the UN) - South Australia in 1987- “Forgiveness Policy”, police ended up prosecuting, more arrests (unintended consequences) increase costs on police - Decriminalization and Depenalization leads to saving money for criminal justice, no change in drug usage of health status - Not a causal relationship in regards to trends in drug use - Mortality rates decrease, drug trends fell, infectious disease rates fell, heroine usage moved to cocaine usage. Not causal rates or relationship - Small decreases in reported use, more large drug seizures, prices decrease Live and Cadaveric Donation - Until 2000, cadaveric donation wasn’t legal in Iran, due to religious laws in the Quran - Cadaveric donation , regular donation through the vending system - Requirements: End stage renal disease, 6 month cadaveric donor - DATPA is purely a nonprofit organization - Vendors highly regulated, Contact DATPA - Rigorous medical testing - Government of Iran pays vendor $1200, Recipient or Charity pays $2300-4500 - Citizens only, No illegal trafficking, DATPA no financial incentive to pressure vendors, no waiting list, altruistic donation still exists - Vendors tend to be low income - Poverty line in Iran is $5/mo, donation provides about 67 times the annual income - No tracking system of vendors after donation - Surveys way less people say they would donate again in Iran versus the United States - Vendors slightly less survival rates than donors, may be income difference - Quantity Demanded for Becker and Elias- # on list of those needing organs, and number who die on list - Quantity Supplied- Number of transplants- Donors completely inelastic due to zero payment - Supply prices raise with payment to donors (1 equilibrium price) - Authors do not take willingness, altruism, disutility, assume donors estimate risk, are risk neutral and follow a horizontal (one price) curve - Risk of death, time lost during recovery, risk of reduced quality of life go into calculating value of donation - Kidney Probability of Death * Value of Life, 0.1%*5 million= $5000 average - Liver Probability of Death * Value of Life, 0.33%*5 million = $16,000 average - Weekly earning * Weeks lost during recovery= Wage compensation - Wage calculation does not take into consideration leisure compensation - No good way to estimate reduced quality of life - India averages $1177 for Kidneys, Indian income 1/15 of the U.S (17,000) in US adjustment - May see shift in demand with payments made legal Is the FDA Safe and Effective? (Efficiency) - FDA regulates Food and Drugs, medical products, all must be approved - Cosmetics must contain safe and accurate labeling - Originally the FDA was only able to block drugs within 180 days - 1962 approval of testing plans began - 1992 the Standard and approval status begins - Also approval of label on New Drug Application, the FDA also has to approve of the label - Doctors can still provide “off-label” use - 8% of drugs that start pre-clinical trials make it to markets - Defective design- Bad drugs, causes bad side effects and ineffective at treatment - Defective manufacturing- placebo over real drug - Side effects that weren’t listed; Drug manufacturers can still be sued even if FDA doesn’t allow specific side effect to be listed on label - FDA approval is a partial shield of liability - High liability costs in US vs. Canada - FDA history, how it revolved. 1938 just blocked Liability Law - Liability law provides incentive to create safe products - Increase in cost yet no overall safety increase - Imperfect information and rent seeking results - Monopoly power by patents, incentive to underprovide quality but increase costs - Companies do bare minimum of FDA requirements - Lessen liability, lower prices, increase quantity and social welfare- 1992- END of the author’s study. Assumes all lost years due to drugs and speed, overestimated because other reasons for death. Benefits of speed were cited as greater than the cost. REVIEW SESSION NOTES: EXAM TUESDAY 10AM APRIL 24th - FDA History – How it changed - 1938 only able to block manufacturing, required to submit New Drug Application, also involved in labeling - 1951 distinguished over the counter and prescription medication. Must talk to doctor for prescription, on usage of specific drugs - 1962 instead of blocking, drugs