Micro Chapter 16: PUBLIC CHOICES, PUBLIC GOODS, AND HEALTHCARE

Vouchers a Better Solution?' When a _________ _______ arises because marginal social benefit exceeds the ability and willingness to pay, economists say that vouchers should be used. A voucher is a token that can be used to _____ only the item that the voucher specifies. So a healthcare voucher could be used to buy only ____________ _________________. Laurence Kotlikoff suggests that every American be given a healthcare voucher.

When a market failure arises because marginal social benefit exceeds the ability and willingness to pay, economists say that vouchers should be used. A voucher is a token that can be used to buy only the item that the voucher specifies. So a healthcare voucher could be used to buy only health insurance. Laurence Kotlikoff suggests that every American be given a healthcare voucher.

Different public choices lead to different expenditures and different implications for efficiency and cost of healthcare. Three approaches to public choices are

- Universal coverage, single payer = Private and government insurance = Subsidized private insurance: Obamacare

Public Choice and Political Marketplace: Four groups of decision makers are

- Voters - Firms - Politicians - Bureaucrats

Because the marginal social benefit of healthcare exceeds the marginal benefit perceived by its consumers, a competitive market in healthcare would under provide it. The under provision is:

- inefficient - Unfair Figure 16.7 (next slide) illustrates the inefficient under provision of a competitive market in healthcare.

Why Governments? Governments exist for three reasons. They 1. Establish and maintain ___________ rights. 2. Provide ______________ mechanisms for allocating scarce resources. 3. Implement arrangements that redistribute _________ and _______________.

1. Establish and maintain property rights. 2. Provide nonmarket mechanisms for allocating scarce resources. 3. Implement arrangements that redistribute income and wealth.

Vouchers have four advantages over public provision and private subsidies:

1. Vouchers can be used with public production, private provision, or competition between them. 2. Governments can set the total value of vouchers to overcome bureaucratic overproduction. 3. Vouchers spread the public contribution across millions of consumers. 4. By giving the buying power to patients, producers compete and provide quality service at the lowest attainable cost.

Common Resources

A common resource is rival and nonexcludable. A unit of a common resource can be used only once, but no one can be prevented from using what is available. Ocean fish are a common resource. They are rival because a fish taken by one person isn't available for anyone else. They are nonexcludable because it is difficult to prevent people from catching them.

The Free-Rider Problem A free rider enjoys the benefits of a good or service without paying for it. Because no one can be excluded from the benefits of a public good, everyone has an _____________ to free ride. __________ ______________ create a free-rider problem—the absence of an incentive for people to pay for what they consume.

A free rider enjoys the benefits of a good or service without paying for it. Because no one can be excluded from the benefits of a public good, everyone has an incentive to free ride. Public goods create a free-rider problem—the absence of an incentive for people to pay for what they consume.

Excludable

A good is excludable if only the people who pay for it are able to enjoy its benefits. Brink's security services, East Point Seafood's fish, and a Coldplay concert are examples.

nonexcludable

A good is nonexcludable if it is impossible (or extremely costly) to prevent anyone from benefiting from it. The services of the LAPD, fish in the Pacific Ocean, and a concert on network television are examples.

Nonrival

A good is nonrival if one person's use of it does not decrease the quantity available for someone else. The services of the LAPD and a concert on network television are nonrival.

Rival

A good is rival if one person's use of it decreases the quantity available for someone else. A Brink's truck can't deliver cash to two banks at the same time. A fish can be consumed only once.

Natural Monopoly Goods

A natural monopoly good is nonrival and excludable. A special case of natural monopoly arises when the good or service can be produced at zero marginal cost. Such a good is nonrival. If it is also excludable, it is produced by a natural monopoly. The Internet and cable television are examples.

A Four-Fold Classification: Private Goods

A private good is both rival and excludable. A can of Coke and a fish on East Point Seafood's farm are examples of private goods.

Public Choices Examples of public choices include:

A public choice is a decision that has consequences for many people and perhaps for an entire society. Examples of public choices include: Decisions by political leaders and senior public servants about price and quantity regulation, taxes, international trade, and government spending. Some of the things we care most about are decided by people making public choices, and very large quantities of scarce resources get used as a result of these choices. Why do governments allocate a large quantity of resources?

Public goods

A public good is both nonrival and nonexcludable. A public good can be consumed simultaneously by everyone, and no one can be excluded from its benefits. National defense is the best example of a public good.

Slide 9

Bureaucrats try to get the biggest possible budget for their departments and ...provide public goods and services.

Efficient Public Provision

Because the government can tax all the consumers of the public good and force everyone to pay for its provision, public provision overcomes the free-rider problem. If two political parties compete, each is driven to propose the efficient quantity of a public good. A party that proposes either too much or too little can be beaten by one that proposes the efficient amount because more people vote for an increase in net benefit.

Objective of Bureaucrats (Dont spend too much time on this)

Bureaucrats want to maximize their department's budget. A bigger budget increases their status and power .Bureaucrats might try to persuade politicians to provide more than the efficient quantity.

The Marginal Social Cost of a Public Good

The marginal social cost of a public good is determined in the same way as that of a private good.

Defenders of this system say that inefficiencies are ________ and _________ accepting because the outcome is ______. Everyone has ________ access to services. But it isn't exactly true that everyone has _________ access. Some people are better at playing the system than others and are able to jump the line.

Defenders of this system say that inefficiencies are small and worth accepting because the outcome is fair. Everyone has equal access to services. But it isn't exactly true that everyone has equal access. Some people are better at playing the system than others and are able to jump the line.

Slide 42

Demand is determined by perceived marginal benefit. The curve D = MB shows the demand for healthcare. The curve S = MSC shows the supply of healthcare. The competitive market equilibrium is 0.3 billion patients a year.

Slide 56

Does Obamacare achieve an efficient outcome? To know if it does or not, we would need to have an estimate of the extent to which the marginal social benefit of health insurance for the affected families exceeds their ability and willingness to pay.

Slide 55

Figure 16.10 illustrates how the Obamacare works. A subsidy of $5,000 per family puts a gap between the price paid of $4,000 and the price received by the insurer, $9,000. The total payment of $40 billion per year is the area of the blue rectangle.Obamacare increases the number of people insured.

Slide 17

Figure 16.2 shows this four-fold classification of goods and services.

Slide 27

Figure 16.4 illustrates the efficient quantity of a public good.With fewer than 3 airplanes, MSB exceeds MSC.Resources can be used more efficiently by increasing the quantity.

Slide 31

Figure 16.5 illustrates the efficient political outcome. Two parties, Hopes and Fears, agree on everything except the number of airplanes. If Hopes propose 2 airplanes and Fears propose 4, voters are equally unhappy and the election is too close to call.

Slide 36

Figure 16.6 shows bureaucratic overprovision. If rationally ignorant voters enable the bureaucrats to achieve their goal of maximizing their budget, ... the public good might be overprovided and a deadweight loss created.

Slide 52

Figure 16.9 shows how the system works.The quantity is determined by the quantity demanded by patients at the out-of-pocket price.Doctors supply the quantity demanded by patients.The quantity exceeds the efficient quantity and creates a deadweight loss.

Slide 53

Figure 16.9(b) illustrates the expenditure paid by - Patients - Private insurers - Government Government expenditure is determined by the quantity of care demanded, not by a fixed budget.

Slide 23

Fire-fighting airplanes are a public good. Figure 16.3 shows that the marginal social benefit of a public good is the sum of marginal benefits of everyone at each quantity of the good provided. Part (a) shows Lisa's marginal benefit.Part (b) shows Max's marginal benefit.

Can't Afford

For many people, the price of health insurance is beyond their ability to pay for it. Two groups of people are unable to afford adequate health insurance: those with a long-term health problem and the aged. But these are the people with the greatest need for healthcare. Most people want these people to have access to affordable healthcare. So there is an additional social benefit from healthcare.

Education Governments provide public education because it brings benefits that spill over to others—called _______________. Everyone benefits from living in an educated society.

Governments provide public education because it brings benefits that spill over to others—called external benefits. Everyone benefits from living in an educated society.

Healthcare is two goods:

Healthcare is two goods: healthcare service and health insurance. Governments provide both gods because, left to the market alone, they would be inefficiently underprovided and unfairly distributed.

Slide 32

If Hopes increase the number of airplanes to 3, it will win the election if Fears propose 4. If Fears decrease the number of airplanes to 3, it will win the election if Hopes propose 2. Both parties propose 3 airplanes and each party gets 50 percent of the votes.

Inefficient Private Provision

If a private firm tried to produce and sell a public good, almost no one would buy it. The free-rider problem results in too little of the good being produced by a private firm.

Inefficient Public Overprovision

If competition between two political parties is to deliver the efficient quantity of a public good, bureaucrats must cooperate and help achieve this outcome.

Political Equilibrium (Slide 10)

In a political equilibrium the choices of voters, firms, politicians, and bureaucrats are compatible ... and no group can see a way of improving its position by making a different choice.

Private and Government Insurance

In the United States, most healthcare services are produced by private doctors and hospitals that receive their incomes from three sources: - Private health insurance (43 percent) - Government (Medicare, Medicaid, etc 48 percent). - Patients (9 percent) The quantity of healthcare provided is 1 billion patients per year. (3 physician visits per person per year.)

The Things Our Governments Buy

Of the things governments buy national defense, protection, and constructing and maintaining the transportation infrastructure fit the definition of a public good. They are nonrival and nonexcludable. But what about healthcare and education? They are rival and excludable, so aren't they private goods? Why do governments provide them?

Slide 49

Patients face zero price, so the quantity demanded exceeds the quantity supplied.The available healthcare resources are allocated by doctors.Patients wait for treatment.

Underestimate Benefit

People don't have enough information to value the benefit of healthcare correctly. Many (especially healthy and young people) optimistically underestimate the health risks that they face. So they undervalue the insurance policies that can help them pay for healthcare and the healthcare resources that stand ready to help them when needed.

Underestimate Future Needs

People take too short a view of the benefits of healthcare. The young and healthy don't plan far into the future when they will be old and unhealthy. The end result is that many people perceive too small a marginal benefit from health insurance, and are not willing to pay what it is actually worth to them.

Rational Ignorance Rational ignorance is the decision by a voter ______ ___ acquire information about a policy or provision of a public good because the cost of doing so __________ the expected benefit. For voters who ____________ but don't produce a public good, it is rational to be ___________ about the costs and benefits. For voters who produce a public good, it is rational to be ____________. When the rationality of uninformed voters and special interest groups is taken into account, the political equilibrium results in _______ __________ of a public good.

Rational ignorance is the decision by a voter not to acquire information about a policy or provision of a public good because the cost of doing so exceeds the expected benefit. For voters who consume but don't produce a public good, it is rational to be ignorant about the costs and benefits. For voters who produce a public good, it is rational to be well informed. When the rationality of uninformed voters and special interest groups is taken into account, the political equilibrium results in overprovision of a public good.

Government failure Replacing markets with government resource allocation decisions is no simple matter. Government failure is a situation in which government actions lead to ___________ Government failure can lead to _______________ or _____________ _______________

Replacing markets with government resource allocation decisions is no simple matter. Government failure is a situation in which government actions lead to inefficiency Government failure can lead to overprovision or under provision.

Obamacare

The Patient Protection and Affordable Care Act, 2010 has created a Health Insurance Marketplace to provide subsidized insurance. The market quantity is 2 million insured at a price of $6,000 per family.

Principle of Minimum Differentiation

The attempt by politicians to appeal to a majority of voters leads them to the same policies—an example of the principle of minimum differentiation. The principle of minimum differentiation is the tendency for competitors (including political parties) to make themselves similar so as to appeal to the maximum number of clients (voters). (The same principle applies to competing firms such as McDonald's and Burger King.)

Slide 43

The curve MSB shows the marginal social benefit from healthcare. The efficient quantity is 0.7 billion patients a year. Underprovision create a deadweight loss shown by the gray triangle.

Slide 48

The demand curve D = MB, the supply curve S = MSC, and the curve MSB are the same as in Fig. 16.7.The quantity supplied is fixed at a level that exceeds the market equilibrium, ...but less than the efficient quantity.A deadweight loss arises.

Slide 24

The economy's marginal social benefit of a public good is the sum of the marginal benefits of all individuals at each quantity of the good provided. The economy's marginal social benefit curve for a public good is the vertical sum of all individual marginal benefit curves.

The Efficient Quantity of a Public Good

The efficient quantity of a public good is the quantity at which marginal social benefit equals marginal social cost.

The key reason why governments play a large role in healthcare is that ... Healthcare Market Failure: Three problems make healthcare a special good is that people

The key reason why governments play a large role in healthcare is that ... it would be underprovided and unfairly distributed if left to the market alone. Three problems make healthcare a special good is that people: - Underestimate its benefit - Underestimate their future needs - Can't afford the care they need

Slide 25

The marginal social benefit curve for a public good contrasts with the demand curve for a private good, which is the horizontal sum of the individual demand curves at each price.

Unfair The people who receive healthcare are only the ones who are __________ and ________ to pay for it. The people who don't receive healthcare bear the _________________ ________. They are the _____________ ________ and the ______ who can't afford the cost of healthcare. Because the market would deliver an inefficient and unfair outcome, healthcare is provided by the public choices of __________________.

The people who receive healthcare are only the ones who are willing and able to pay for it. The people who don't receive healthcare bear the deadweight loss. They are the long-term sick and the aged who can't afford the cost of healthcare. Because the market would deliver an inefficient and unfair outcome, healthcare is provided by the public choices of governments.

The _______ ___ ___________ __________ is the maximum amount that a person is willing to pay for one more unit of it. The _______ ___ ________ ____________ is the maximum amount that _____ the people are willing to pay for one more unit of it. To calculate the value placed on a public good, we use the concepts of _______ benefit and ___________ benefit.

The value of a public good is the maximum amount that a person is willing to pay for one more unit of it. The value of a public good is the maximum amount that all the people are willing to pay for one more unit of it. To calculate the value placed on a public good, we use the concepts of total benefit and marginal benefit.

Alternative Public Choice Solutions

There is a wide range of levels of public funding of healthcare. Healthcare paid by public expenditure are - 83 percent in the United Kingdom - 70 percent in Canada = 48 percent in the United States But among these countries, public expenditure per person is highest in the United States.

What Is a Public Good? What is the essential difference between: - A city police department and Brink's security? - Fish in the Atlantic Ocean and fish in a fish farm? - A live concert and a concert on television?

These and all goods and services can be classified according to whether they are excludable or nonexcludable and rival or nonrival.

Universal Coverage, Single Payer

This system is used in Canada and the United Kingdom. Universal coverage means everyone is covered, no exceptions. Single payer means government buys the healthcare and chooses the quantity to supply. Patients access healthcare at zero (or low) price. Figure 16.8 (next slide) shows how this system works.

Marginal Social Benefit from a Public Good ________ ___________ is the dollar value that a person places on a given quantity of a good. The greater the quantity of a good, the ___________ is a person's total benefit. ______________ ___________ is the increase in total benefit that results from a one-unit ________________ in the quantity of a good. The marginal benefit of a public good ________________ with the quantity of the good provided.

Total benefit is the dollar value that a person places on a given quantity of a good. The greater the quantity of a good, the larger is a person's total benefit. Marginal benefit is the increase in total benefit that results from a one-unit increase in the quantity of a good. The marginal benefit of a public good diminishes with the quantity of the good provided.

Political Marketplace (Slide 8)

Voters express their demand via votes. Voters and firms express their demand for policies via campaign contributions. Politicians express their supply of policies with proposals which they hope will attract votes.

Slide 28

With more than 3 airplanes, MSC exceeds MSB.Resources can be used more efficiently if fewer airplanes are provided.So only at the quantity at which MSB = MSC are resources used efficiently.Private production would produce 0 airplanes.