health economics- lecture ch18

8/3/2019 Health Economics- Lecture Ch18

http://slidepdf.com/reader/full/health-economics-lecture-ch18 1/26

Equity, Efficiency, and Need

Dr. Katherine Sauer

Metropolitan State College of Denver

Health Economics



Chapter outline:

1. Pareto Efficiency

2. Need

3. Social Welfare and Theories of Social Justice



Americans believe that equity and efficiency in the health

care system are fundamental issues.

Welfare Economics ± study of normative economic issues

tool: Edgeworth Box for exchange

- use to generate the First Fundamental Theorem

of Welfare Economics

- illustrate the Second Fundamental Theorem of

Welfare Economics



Pareto Efficiency (optimality): an outcome is

economically efficient if it is impossible to improve one person¶s situation with out harming another person

2 goods: food, medicine

2 people: personA and person B

fixed amount of each good: F, M

(any point in the box represents an exhaustionof all goods)



PersonA

Person B

Medicine

Medicine

0

0

F o o d

F o

o d

F

F

M

M

ma

m b

f a

f b



PersonA

Person B

Medicine

Medicine

0

0

F o o d

F o

o d

F

F

M

M



PersonA

Person B

Medicine

Medicine

0

0

F o o d

F o

o d

F

F

M

M

Is point X Pareto efficient?

X

Y

Z



Pareto efficient points will be at the tangency point of the

indifference curves.

If you connect all the points of tangency in an Edgeworth

box, you will find the contract curve.



PersonA

Person B

Medicine

Medicine

0

0

F o o d

F o

o d

F

F

M

M



Finding the Competitive Equilibrium:

- people treat price as given

- people choose the utility-maximizing bundle

subject to their budget constraint

(handout)



Question: Are health care markets sufficiently

competitive to use this model?

competitive market characteristics:

free entry/exit

perfect information

homogeneous product

large number of buyers/sellers with no

power over price

no externalities, no public goods, no natural

monopolies



Theory of the Second Best ± can¶t assume policy that

improves competitive elements of the market will improve

welfare

-we operate in a world of second best



II. Need

Even if we can identify the efficient allocation of health

care in society, we may find many people dissatisfied

with the outcome.

- an efficient outcome does not mean peopleget the health care they need

Equity concerns may trump efficiency.

So what is health care ³need´?



It is appropriate to define health need within the context

of society¶s choices of all of its public goods.

- goals for health, education, defense

HC

HS (HC, E, LS, HB)

HCmax

HS

HSmax

HS1

HC1



How is the health status goal selected?

3. Social Welfare and Theories of Social Justice

Consider the two person world. If one person had the

entire endowment, the equilibrium would be Pareto

efficient but wouldn¶t be optimal for society.

Economic theory suggests that a social welfare function is

necessary to determine which efficient point is chosen.

- reflect society¶s overall preferences



The Utility-Possibility Frontier

We can trace out a UPF from the points in the Edgeworth box on the contract curve.

- each point represents a utility level for each

person

- at the bottom left of the EB, person 1 has noutility and person 2 achieves their maximum

utility

- as you move up along the contract curve person

1¶s utility rises while person 2¶s utility falls



Person 1

Person 2

UPF



It is up to society to choose the point on the UPF.

Social Welfare Function:

SW= f (U1, U2, U3, «, Un)

Society is perceived to be efficient when it acts as if itwere choosing among its variables to maximize the social

welfare function.

Society should choose the highest social indifferencecurve attainable with the given utility-possibility frontier.



Suppose we want everyone to have the same utility.

(egalitarian preferences)

Person 1

Person 2



How about providing for a minimum standard of living

(level of utility)?

Person 1

Person 2

U2min

U1min

Society would only

choose points on the

UPF between the

constraints.



What if society¶s preferences favor person 2?

Person 1

Person 2



But can we really treat health care like other social goals?

Some argue that health care is ³special´ and the economicview of society¶s well-being is flawed.

- depends on the ind ividual¶s conception of their

own well being

- reliance on Pareto principle- social choice issues depend solely on individual

utilities



Economic criticism of need-based distributions:

1. bottomless pit ± health care needs that are at or close tothe maximum have a very low marginal benefit

2. needs shouldn¶t be chosen independently of cost

(health care has an opportunity cost)

3. need can¶t be solely determined from science

4. often needs analyses are based on the assumption of using one particular technology (monotechnic needs)



Theories of Social Justice

- ethical theories that serve to determine a fair or

just distribution of economic resources

ut il itar iani sm - ³greatest good for the greatest number´

- maximize the sum of all utilities

- accept harm for a few in return for the greater good

critique: relies on cardinal utility

who¶s utility should be counted? (fetus?)is malevolent utility counted?



Rawlsian Just ice - social choices must be fair, they

shouldn¶t be dominated by people with economic or

political power who have vested interests because of their circumstances in society

To be fair, we should make our choices from a position

separated from any vested interest.-³veil of ignorance´

- maximize the utility of the worst off

³maximin´ principle

critique: assumes we are risk averse behind the veil

subject to ³bottomless pit´



Liberal i sm

Classic: emphasizes rights of individual to property

and to self

- person is free to choose what he deems bestself/ family

- government to tax/provide programs

Modern: government must limit itself to only

necessary services ³minimal state´

- ³libertarian constraint´ ± the system of

social organization should

1)prohibit coercion

2) let people keep property from

voluntary transactions

critique: libertarian constraint

health economics- lecture ch18

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