Principles of Microeconomics: Chapter 18-Health Insurance and Health Care & Chapter 19-International Trade

This occurs when a foreign supplier sells a good below the price it charges in its home country. It is often a deliberate effort to gain a foothold in a foreign market. It can also be the result of subsidies within foreign countries.

Dumping

HMO (Health Maintenance Organization)

A managed care organization that provides comprehensive medical services for a predetermined annual fee per enrollee.

What is globalization?

A process that involves the entire world and results in making something worldwide in scope.

Tariffs are taxes levied on imported goods and services.

A tariff is paid by the producer of the good when the good arrives in a foreign country.

ad valorem tax

A tax levied according to value, generally used to refer to real estate tax. Also called the general tax.

PPO (Preferred Provider Organization)

A type of health plan that contracts with medical providers, such as hospitals and doctors, to create a network of participating providers. You pay less if you use providers that belong to the plan's network.

Which of the following explains diminishing returns in health care? A) Treatment for diseases related to lifestyle or genetics often produces only modest results. B) Healthcare resources are often in limited supply. C) Demand for health care is relatively inelastic.

A) Because health problems associated with old age are another limiting factor. It is more expensive to help an 85-year-old reach 90 than to help a 40-year-old reach 45.

Match each of the following motivations for trade restrictions to the argument against that reason. A) In practice, tariffs are often used to limit imports from friendly nations. B) Regardless of how many producers benefit from trade restrictions, even more consumers will be hurt because of higher prices. C) Well-established industries are able to lobby for trade restrictions to stay in place. 1.) National Security Interests 2.) Favors to special interests 3.) Protecting infant industries

A) National Security Interests B) Favors to special interests C) Protecting infant industries

"To economists, human life is not of infinite value." Explain this statement and its economic implications for end-of-life care.

Human life is not of infinite value because we live in a world of trade-offs. An "infinite value" implies that the value is so high that all medical paths are worth pursuing. However, one must be mindful of the marginal cost of care versus the amount of additional life that end-of-life care buys. This consideration is especially important at the end of life when extraordinary medical efforts might mean only a few extra days of low-quality life. The law of diminishing return applies, and the application of this economic principle suggests that resources should be redirected from end-of-life care to preventive care with larger returns.

What happens to exports, trade deficit, and imports during a time of recession?

Imports tend to generally drop and trade deficits tend to shrink during downturns. Exports also drop during recessions.

What are reasons for international trade to increase?

Increased specialization among nations. Reduced trade barriers Lower Shipping Costs

In order to get the opportunity cost of something,

divide the opposite product output by the product's output whose opportunity cost you are finding. For example the opportunity cost of B is A/B

If a nation exports a good when the economy is open to trade, relative to the autocracy price, the domestic price of the goodwill _____ and domestic consumption will _____.

rise; fall

The difference between a nation's total exports and total imports is its

trade balance.

What are two benefits of free trade due to increased competition?

Domestic firms become more innovative AND Consumers have more options to choose from.

How do Incentives Influence the Quality of Health Care?

*A single-payer system makes the government the single buyer, or monopsonist, of most medical care. The government uses its leverage as a monopsonist to set compensation levels for providers below the competitive market wage rate. Single-payer systems ration medical services through increased wait times, whereas private healthcare systems ration medical care through prices. *The demand for many replacement organs exceeds the supply made available each year. However, because of the National Organ Transplant Act of 1984, it is illegal to sell most organs in the United States.

How does Asymmetric Information Affect Healthcare Delivery?

*Asymmetric information (adverse selection, the principal-agent problem, and moral hazard) affects incentives in healthcare delivery. Insurance companies try to structure their plans to encourage patients to seek care only when it is needed and also to seek preventive care. The companies can achieve these goals by making many preventive care visits free and establishing deductibles and copayments that are high enough to discourage unnecessary trips to the doctor or a demand for additional procedures. *Inelastic demand for many medical services, combined with third-party payments that significantly lower out-of-pocket expenses to consumers, gives rise to a serious moral hazard problem in which patients demand more medical care than is medically advisable. To solve a moral hazard problem, it is necessary to fix the incentive structure. Moral hazard explains why many insurance companies encourage preventive care: it lowers medical costs.

How do Demand and Supply Contribute to High Medical Costs?

*Inelastic demand and third-party payments help explain why medical expenses have risen so rapidly. The combination of third-party payments and inelastic demand for medical care increases the quantity of medical care demanded; both factors also result in increased expenditures. As we learned previously, more demand means higher prices, all else equal.

What are the important issues in the healthcare industry?

*The healthcare debate is about efficiency and cost containment. Increases in longevity and quality of life are subject to diminishing returns and require choices with difficult trade-offs. *The widespread use of insurance alters the incentives consumers and producers face when making healthcare decisions. Consumers pay premiums up front and much smaller deductibles and copayments when seeking medical care. Producers receive the bulk of their revenue from intermediaries such as insurance companies. The result is a system in which consumers demand more medical care because they are insured and many providers have an incentive to order additional tests or procedures that may not be absolutely necessary.

How does international trade help the economy?

-gains from trade occur when a nation specializes in the production and exchanges its output with a trading partner -each nation must produce goods for which it is a low-opportunity-cost producer and then trade them for goods for which it is a high-opportunity-cost producer -trade benefits nations' economies through economies of scale and increased international competition

What Are the Effects of Tariffs and Quotas?

-protectionism in the form of trade restrictions, such as tariffs and quotas, is common. A tariff is a tax on imports; a quota is a quantity restriction on imports. -proponents of trade restrictions often cite the need to protect defense-related industries and fledgling firms and to fend off dumping.

principal-agent problem examples

1. Parents (the principal) hire a babysitter (the agent) to watch their children, but the babysitter might talk on the phone instead. 2. A company manager (the agent) might try to maximize his own salary instead of working to increase value for the shareholders (the principal).

The U.S. tariff on Chinese tires imposed in 2009, resulted in a drop in imports from 13 million tires to just 5.6 million tires in one quarter. In addition, within a year, average radial car tire prices rose by about $8 per tire in the United States: the average price of Chinese tires rose from $30.79 to $37.98, while the average price of tires from all other nations rose from $53.94 to $62.05. 1. Who were the winners and losers domestically from this tire tariff? 2. Who would be the winners and losers overseas?

1. The winners would be the domestic tire makers and the government since it collects the tariffs. The losers were U.S. tire consumers, who saw prices rise by about $8 per tire. 2. The winners are the producers of the tires from everywhere except China. Because this tariff was targeted at a single nation, it did not affect tire producers in other nations. Non-Chinese tire producers realized an average of $8 more per tire. The losers were Chinese tire manufacturers.

One consequence of using prices to ration medical care is that close to

35 million U.S. citizens forgo some medical care because they lack insurance or the means to pay for care on their own.

Similar to copayments and premiums, a ___________ are fixed amounts the insured must pay before most of the policy's benefits can be applied.

Deductibles

_____ are sometimes subject to exceptions, such as a necessary visit to the emergency room or preventive physician visits and tests.

Deductibles

This happens when one party has information about some aspect of product quality that the other party does not have. For example, A car salesman knows that he has a faulty car, which is worth $1,000. However, the customer has no idea bout these faults.

Adverse Selection

There are two forms of asymmetric information: Adverse Selection, Contrary Selection, General Selection, or Principal-agent problem.

Adverse Selection and Principal-agent problem

This is a fixed fee that the insured pays when receiving a medical service or filling a prescription.

Copayments

This is a situation when one party knows more than the other. In other words, there is a imbalance of information.

Asymmetric information

An isolated community has one hospital. The next closest hospital is 2 hours away. Given what you have learned about monopoly, what prices would you expect the hospital to charge? How much care would you expect the hospital to charge? Compare the prices and amount of care provided to those of a comparably sized hospital in a major metropolitan area where competition is prevalent.

Because the demand for medical care is quite inelastic (most hospitals are), an isolated hospital with significant monopoly power will charge more and offer fewer services. In contrast, a comparably sized hospital in a major metropolitan area where competition is usual is forced to charge the market price and offer more services to attract consumers.

Is globalization good or bad?

Both! Can be good for some, may be bad for others

Which of these groups would be indifferent between the tariff and the quota?

Buyers/ Domestic buyers Domestic Producers

As an individual's deductible decreases, one would expect his or her number of annual doctor's office visits to decrease as well.

False: As the deductible decreases, the individual is responsible for less of the expense and thus would demand a higher quantity of doctor visits.

Given the inelasticity of demand for health care, policymakers should focus on regulating the price of medical services to change consumption behavior.

False: The most expensive procedures are the ones where demand is especially inelastic. Someone in need of a heart transplant is not in a position to make different consumption choices.

Copayment example

Insurance companies use copayments in part to share expenses with the insured.

______________ cover certain medical expenses in exchange for a set monthly fee.

Intermediaries

What are some reasons for healthcare expenses being so high in the United States?

Low Patient copayments and doctors' fear of malpractice lawsuits.

We learned that when caps are placed on how much a physician can be paid for a service under Medicare, doctors charge more for other services. Can you think of anything else a physician might decide to do if they feel that what Medicare pays is insufficient to cover their costs?

Medicare is a government program, but physicians are not required to participate. Therefore, another option is not to participate, which is exactly what some doctors decide to do. These doctors have decided that as long as they're able to keep their appointment books reasonably full with non-Medicare patients, the opportunity cost of taking Medicare patients is too high.

This is the lack of incentive to guard against risk where one is protected from its consequences.

Moral Hazard

The total exports of final goods and services minus total imports of final goods and services.

Net Exports

This situation arises when a leading role entrusts an agent to complete a task and the agent does not do so in a satisfactory way.

Principal-agent problem

This is a blanket term for governmental actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition.

Protectionism

For each criterion, which country's healthcare system performs better—Canada or the United States?

The Canadian System: Overall per capita cost of the health care Healthcare access to even the poorest because it is paid for by taxes. The U.S. System: Shorter wait times to receive needed health care Availability of all needed drugs.

What has been happening to the United States regarding International Trade as of 2017?

The United States has an overall trade deficit. AND The majority of U.S. goods imports come from fewer than ten nations.

This international organization facilitates trade agreements between nations.

The World Trade Organization (WTO)

comparative advantage

The ability of a country to produce a good it is best at making. So then you can trade the product with other nations for the good they are good at making.

What is the consequence when a tariff of $20 per pair of shoes is levied?

The amount imported drops to QT-QD2. At the same time, the amount supplied by domestic producers rises along the domestic-only supply curve from Qd1 to Qd2

single-payer system

The government covers the cost of providing most healthcare, and citizens pay their share through taxes.

Quotas function like tariffs with one crucial exception

The government does not receive any tax revenue.

If a nation exports more than it imports, it has a positive trade balance, also known as a: 1) Trade deficit 2) Trade surplus 3) Trade shortage 4) Trade balance

Trade surplus

True or False: Developing countries stand to gain from international trade because trade enables them to specialize in producing where they have a comparative advantage.

True because once trade is built on the concept of specialization and the application of comparative advantage in that process.

True or False: Developing countries stand to gain from international trade because trade subjects their local producers to greater competition.

True because trade effectively increases the number of potential competitors in the market, local producers are subject to more competition than would exist without trade.

True or False: Developing countries stand to gain from international trade because trade allows them to produce larger amounts than they could consume themselves, allowing them to take advantage of increasing returns to scale.

True because when countries export goods, they benefit from being able to access a larger marketplace, which gives them the opportunity to produce at a larger scale than they would without trade.

The Impact of a Quota

When a quota is imposed, the price rises and domestic production expands from QD1 to QD2. At the same time, imports fall to QQ(Quantity Quota) - QD2(2nd Quantity Demand). Quotas create deadweight loss, a gain for foreign suppliers, and an increased producer surplus for domestic firms.

The Impact of a tariff

When a tariff is imposed, the price rises and domestic production expands from QD1 to QD2. At the same time, imports fall to QT (Quantity tariff) - QD2. Tariffs also create a deadweight loss, revenue for the government, and increased producer surplus for domestic firms.

Newer automobiles have many safety features to prevent accidents, including antilock brakes, side airbags, traction control, and rear backup sensors. Do these safety features lead the drivers of newer vehicles to drive more safely?

When drivers feel safer, they drive faster. The higher speed offsets the safety gain from safety features that help prevent accidents or make them survivable. Drivers of vehicles who feel especially safe are more likely to take on hazardous conditions and become involved in accidents. In other words, they alter their behavior when driving a safer car. The change in behavior is evidence of a moral hazard problem.

Adverse selection happens before the exchange.

While, Moral Hazard can happen after the exchange.

What is an economic downturn?

a general slowdown in economic activity over a sustained period of time. The main features of an economic downturn include rising unemployment, falling share and house prices, low consumer confidence and declining investment.

The final type of premium payment is ___________ payments, a percentage the insured pays after the insurance policy's deductible is exceeded up to the policy's contribution limit.

coinsurance payments

The _____ serves to prevent most people from seeking care for common conditions that are easy to treat at home

copay

If a nation imports more than it exports, it has a trade ____________________.

deficit

There are over 500,000 medical facilities in this country, including small medical offices, large regional hospitals, nursing homes, pharmacies, and stores that supply medical equipment.

in addition, pharmaceutical companies generate over $300 billion in annual sales in the United States.

Specific Tariff

levied as a fixed charge for each unit of a good imported

Import quotas are:

limits on the number of products that can be imported into a country.

Trade leads to

lower costs of production and maximizes the combined output of all nations involved.

Covering certain utility in exchange for a fixed monthly fee is known as

premium

If trade is unrestricted, imports are free to enter the domestic market

so that supply increases to S(free trade).

capital intensive

the amount of capital invested so as to increase the revenue and profit

labor intensive

the amount spent on training to labor so as to increase the efficiency of labor which will ultimately result in the increased production.

Comparative advantage of A goes to

the one with the lowest opportunity cost of A.

One argument for trade barriers is that domestic industries sometimes need trade protection ------- develop the capacity to compete internationally. Unfortunately, however, for ------- reasons, trade barriers are harder to ------- than they are to -------.

while they political remove establish

Because trade is unrestricted, domestic producers who might wish to charge a price higher than that charged by foreign producers

would find that they could not sell their shoes at that price. As a result, the domestic price decreases to the world price, which is $100.