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Quality of life Today: Health care; environmental regulation; workplace safety
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Quality of life
Today: Health care; environmental regulation;
workplace safety
Today
Three mini-lectures about issues related to quality of life Health care
Full coverage is wasteful Environmental regulation
Finding the lowest cost way to cut pollution
Workplace safety How much safety is enough?
Health care
“By 2017, total health care spending will double to more than $4 trillion a year, accounting for one of every $5 the nation spends, the federal government projects.”(Source: AP article on CBS’ website, “Health Care Will Cost $4 Trillion by 2017,” posted Feb. 26, 2008; see readings on class website for link)
Health care More from the AP article, quoting
Centers for Medicare and Medicaid Services economists "Health is projected to consume an
expanding share of the economy, which means that policymakers, insurers and the public will face increasingly difficult decisions about the way health care is delivered and paid for"
Health care
As we will see, there is often too much money spent on health care, relative to the optimal amount of spending
We will look at a simple case with constant MC
Health care Health care
services, like all goods and services, have a demand schedule Demand denoted
by MB curve
Health care Suppose that
Angela has been admitted to the hospital after being in a car accident
She has a substantial MB for the first night in the hospital, due to the care that she needs
Health care As Angela’s
condition improves, her MB declines
After Q2 days in the hospital, she is completely better
Will Angela pay for the full cost of her hospital stay? Not likely
Most Americans have at least some health insurance
Insured person usually pays a deductible or co-payment for medical services
Some people have complete medical coverage
No direct payment made to those that provide medical services
Equilibrium length of hospital stay with co-payment
Assume that Angela pays X dollars (co-payment) for her hospital stay Let X be small relative to total hospital
bill Angela will then decide to stay in the
hospital as long as MB for each night exceeds its MC Note that Angela’s private MC is zero
under this form of insurance
Equilibrium length of hospital stay with co-payment PUBLIC MC is positive Angela’s PRIVATE MC
is zero If hospital lets Angela
stay in the hospital as long as she wants, equilibrium occurs at Q2
MB and private MC are both zero here
What is optimal? Angela’s optimal
length of hospital stay occurs when the PUBLIC MC equals MB This occurs at
point A
What about a percentage co-payment? What if Angela
had to pay 20% of her costs while in the hospital Her PRIVATE MC
is now two-tenths of MC curve (See dashed line)
Equilibrium is at the yellow circle
0.2 MC
What are some possible solutions to this problem? Health Maintenance Organizations (HMOs)
Patients less likely to receive services with low MB
Higher deductibles Closer to optimal outcome, since out-of-pocket
payments are higher Reimbursement policies for medical
services Review boards Discharge criteria from hospitals
Moral hazard With insurance, people are likely to do
riskier activities, knowing that insurance will cover them if they get hurt Skydiving Bungee jumping Mountain climbing
These activities lead to more medical costs, leading to higher premiums for everyone
Health care costs
Is there a single solution to lowering health care costs? No: Many approaches will be needed
Another issue: Drug costs Research and Development: Often
millions of dollars for a single drug Patent protection Market power
Summary: Health care Insurance often leads to more health
care being used than what is optimal Co-payments help improve efficiency
some, but not completely Some methods to help lower health
care costs include the use of HMOs, higher deductibles, and reimbursement policies
Environmental regulation
Environmental quality is a good that people want
Problems with providing environmental quality Goods without markets (air quality,
global temperature, rivers) Goods that governments own (parks)
Environmental regulation and externalities Recall Externalities Chapter
With negative externalities, too much of some goods is produced, relative to efficient outcomes possible
Three ways of reducing pollution Taxes Pollution permits Arbitrary controls (also known as
“command and control” methods)
Environmental regulation and efficiency
Assume we are trying to find efficiency in an air-polluted city
To reach the efficient level of pollution, we need to find firms with the lowest cost to abate pollution
Environmental regulation and efficiency Example with 3 firms
Efficient level of pollution, as determined by the government: 5 tons of smoke per day
One of the two approaches (taxes or permits) is needed to solve for the optimal amount of pollution We do not spend much time
on “command and control” methods since it is often sub-optimal
Example Three firms produce light bulbs With no abatement technology, each
firm produces 4 tons of smoke per day 12 tons of smoke with no regulation To reach efficient level of 5 tons, 7 tons
need to be abated Some firms can more easily abate
pollution than others If firms with low abatement costs abate the
most, we can get an efficient result
ExampleTons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 Notice that marginal abatement costs
increase as more is abated Firm A: $14 MC to abate 1st unit; $16 for the
2nd unit; $20 for the 3rd unit; $25 for the 4th unit
ExampleTons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 We need to find the 7 tons with the
lowest abatement MC Let’s start by adding arrows to abatement
MC of $20 per ton or less Not enough: Only 4 tons abated
ExampleTons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 Let’s try $30 abatement MC or less
7 green arrows We now have reached the efficient level of 5
tons of emissions
Our two methods to reach an efficient result
Pollution tax Find a tax such that exactly 7 tons of
pollution will be abated Sell pollution permits
Find a price such that exactly 5 tons of pollution permits are demanded
Pollution taxTons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 Let’s try a $30 tax
Firm A will abate all 4 tons of smoke, since abatement cost is lower for each ton of smoke removed
Firm B will abate 2 tons and pollute 2 tons Firm C will abate 1 ton and pollute 3 tons
Pollution taxTons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 7 tons abated
5 tons polluted We have found a tax that leads to the
efficient pollution level
Pollution permitsTons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 What if you need a permit to pollute?
What if we sell permits for $30 each? Firm A will demand no permits (and abate 4 tons) Firm B will demand 2 permits (and abate 2 tons) Firm C will demand 3 permits (and abate 1 ton)
Pollution permitsTons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 7 tons abated
5 tons polluted We have found a price for permits that
leads to the efficient pollution level
Alternative to taxes and permits: Command-and-control methods
An alternate method to control pollution is for the government to dictate that each firm reduce its pollution by a given percentage Example: Each firm must reduce
emissions by 25% Problem: Usually not efficient
Alternative to taxes and permits: Command-and-control methods
Tons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 Example: Each firm must abate 1 ton
Total cost: $59 Total cost if firm A abates 2 tons and firm
B abates 1 ton: $50 (see green ovals)
Summary: Environmental regulation
Markets with externalities usually require government intervention to have optimal outcomes to occur Taxes: Efficient (with the right tax) Permits: Efficient (if permit price leads
to an efficient amount of pollution) “Command and control” methods:
Almost never efficient
Workplace safety
In a perfectly competitive labor market… Firms will provide the optimal amount
of safety Workers will be hired by a firm
Threat to leave firm will prevent the firm from lowering safety standards
The real world
Many countries have laws dictating a minimum level of safety to workers Why?
Although most labor markets are competitive in the long run, there are frictions in the short run that prevent immediate job movement
What else is going on?
Today’s work affects the company today, but the worker for a lifetime Workers value safety Example: Lose an arm Firm lays you
off; lower worker productivity for a lifetime
Firm does not care about future earnings of the worker
In many countries: Government support needed if the worker is unable to find a job
Unions and workplace safety
Recall that unions not only fight for high wages, but also working conditions
Unions can be beneficial in determining the optimal amount of worker safety
Other methods to increase safety Offer financial incentives
Higher safety Bonuses (money, gift certificates, tickets for prize giveaways)
Increased training Shorter work days
Tired people are more likely to be clumsy and inattentive
Workers’ compensation Insurance system for those injured while
working
An application of safety
Look at Example 15.5 and Exercise 15.4 (p. 437-438) Uses many tools
Benefit/cost analysis Workplace safety Game theory
Prisoner’s dilemma Relative income
Safety outside of the workplace
Many safety laws exist that are not related to workplaces
These laws often affect children, who are “unable to fend for themselves” Child seats in cars Crib safety Reduced speeds near schools
Summary: Workplace safety
Workplace safety laws try to establish an efficient amount of worker safety
Other attempts to increase workplace safety: Unions, financial incentives, increased training, shorter work days, and workers’ compensation programs
