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Transcript of MBMC The Environment, Health, and Safety. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc....
Chapter 15: The Environment, Health, and Safety Slide 2
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Introduction
In response to the oil shocks of the 1970s, policymakers proposed a 50 cents/gallon tax on gasoline.
The gasoline tax would be rebated with a reduction in payroll taxes.
Chapter 15: The Environment, Health, and Safety Slide 3
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Introduction
Proponents said the benefits of the tax would include:Less gasoline consumption.Less pollution.Less highway congestion.
Opponents argued that the quantity demanded of gasoline would not change.
Chapter 15: The Environment, Health, and Safety Slide 4
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Introduction
What Do You Think?Was the opponents argument based on
sound economic logic?
Chapter 15: The Environment, Health, and Safety Slide 5
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Economics ofHealth Care Delivery
Healthcare Spending (% of National Income)1940 -- 4%2005 -- 14%
Reasons for the Increase in CostTechnologyThird-party payment system
Chapter 15: The Environment, Health, and Safety Slide 6
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Economics ofHealth Care Delivery
Applying the Cost-Benefit CriterionThe most efficient way to allocate
healthcare services is with the cost-benefit test.
A medical service should be performed only if the benefit exceeds the cost.
Chapter 15: The Environment, Health, and Safety Slide 7
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Economics ofHealth Care Delivery
Applying the Cost-Benefit CriterionThe third-party payment system has
virtually eliminated the cost-benefit test from the medical services market.
Chapter 15: The Environment, Health, and Safety Slide 8
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Economics ofHealth Care Delivery
ExampleHow long should David stay in the hospital?
Chapter 15: The Environment, Health, and Safety Slide 9
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Demand for Hospital Care
Length of hospital stay (days)
Pri
ce (
$/d
ay)
How long should David stay in the hospital?
D
1
300
3
• Price of hospital rooms = $300/day
• Assume David is paying for his room and MC = MB at 1 day.
• Assume insurance pays for his room and MC to David = 0
• He stays 3 days.
Chapter 15: The Environment, Health, and Safety Slide 10
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Economics ofHealth Care Delivery
ExampleHow much waste does full insurance
coverage cause?
Chapter 15: The Environment, Health, and Safety Slide 11
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Waste That Results from Full Insurance Coverage
Length of hospital stay (days)
Pri
ce (
$/d
ay)
D
1
300
3
S
Benefit from additional stay
Lost surplus from additional stay
• MC = $300/day• 3 day stay benefit =
$300 and cost = $600
• Loss in economic surplus = $300
Chapter 15: The Environment, Health, and Safety Slide 12
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Waste That Results from Full Insurance Coverage
Length of hospital stay (days)
Pri
ce (
$/d
ay)
D
1
300
3
S
Benefit from additional stay
Lost surplus from additional stay
• Assume the insurance company pays David $700.
• David would stay one night.
• The benefit of an extra day is less than the cost ($300).
• The $700 is $200 less than the $900 cost for 3 days.
Chapter 15: The Environment, Health, and Safety Slide 13
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Economics ofHealth Care Delivery
First-dollar Insurance CoverageInsurance that pays all expenses generated
by the insured activity
Health Maintenance Organization (HMO)A group of physicians that provides health
services to individuals and families for a fixed annual fee
Chapter 15: The Environment, Health, and Safety Slide 14
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Economics ofHealth Care Delivery
Designing a SolutionMeasuring price elasticity of demand for
health care (experiment on two groups)Group 1: Receives first-dollar coverage
(insurance that pays all expenses generated by insured activity)
Group 2: $1,000 deductible coverage
Chapter 15: The Environment, Health, and Safety Slide 15
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Economics ofHealth Care Delivery
Designing a SolutionMeasuring price elasticity of demand for
health care (experiment on two groups)Findings
o Group 2 consumers purchased 40% - 50% less health care than Group 1
o No measurable differences in health outcomes
Chapter 15: The Environment, Health, and Safety Slide 16
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Economics ofHealth Care Delivery
Designing a SolutionMeasuring price elasticity of demand for
health care (experiment on two groups)Policy Implications
o Adopt a system of high deductible health insuranceo Use stipend payments for the pooro An efficient policy will increase the size of the health
care pie
Chapter 15: The Environment, Health, and Safety Slide 17
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Economics ofHealth Care Delivery
Economic NaturalistWhy is a patient with a sore knee more
likely to receive an MRI exam if he has conventional health insurance than if he belongs to a health maintenance organization?
Chapter 15: The Environment, Health, and Safety Slide 18
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Economics ofHealth Care Delivery
Economic NaturalistIn the richest country on Earth, why do so
many people lack basic health insurance?
Chapter 15: The Environment, Health, and Safety Slide 19
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Economics ofHealth Care Delivery
Economic NaturalistThe Problem
The cost of health insurance ($5,000/yr for a family of four) exceeds the benefits and healthy families choose not to have health insurance.
As healthy families forgo health insurance, the cost of the insured pool will increase.
Chapter 15: The Environment, Health, and Safety Slide 20
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Economics ofHealth Care Delivery
Economic NaturalistA Possible Solution
A government reimbursement of $5,000 to each family
Cost would be $350 billion/yrHigher taxes offset by higher salaries and
reductions in high cost care for the uninsured
Chapter 15: The Environment, Health, and Safety Slide 21
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Using Price Incentives in Environment Regulation
Goods producing negative externalities tend to be overproduced.To reduce pollution, we must choose how
to distribute pollution control among the producers.
Chapter 15: The Environment, Health, and Safety Slide 22
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Using Price Incentives in Environment Regulation
The most efficient--and hence best--distribution of effort is the one for which each polluter’s marginal cost of abatement is exactly the same.
Requiring all firms to reduce their pollution by an equal amount will be inefficient if the firms have different marginal costs of pollution abatement.
Chapter 15: The Environment, Health, and Safety Slide 23
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Using Price Incentives in Environment Regulation
ExampleWhat is the least costly way to cut pollution
by half?
Chapter 15: The Environment, Health, and Safety Slide 24
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Costs and Emissions for Different Production Processes
Process(smoke)
A(4 tons/day)
C(2 tons/day)
B(3 tons/day)
Cost to Sludge Oil($/day)
D(1 ton/day)
E(0 tons/day)
100 200 600 1,300 2,300
Cost to NorthwestLumber ($/day)
300 320 380 480 700
Scenario I•No pollution regulation•No negotiation between producers & those harmed by pollution•Each firm will produce 4 tons/day of pollution
What is the least costly way to cut pollution by half?
Chapter 15: The Environment, Health, and Safety Slide 25
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Costs and Emissions for Different Production Processes
Process(smoke)
A(4 tons/day)
C(2 tons/day)
B(3 tons/day)
D(1 ton/day)
E(0 tons/day)
100 200 600 1,300 2,300
300 320 380 480 700
Scenario II•Require each firm to reduce pollution by half•Each firm will use process C
•Cost to Sludge Oil = $600 - $100 = $500/day•Cost to Northwest Lumber = $380 - $300 = $80/day•Total Cost = $580/day
What is the least costly way to cut pollution by half?
Cost to Sludge Oil($/day)
Cost to NorthwestLumber ($/day)
Chapter 15: The Environment, Health, and Safety Slide 26
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Costs and Emissions for Different Production Processes
Process(smoke)
A(4 tons/day)
C(2 tons/day)
B(3 tons/day)
D(1 ton/day)
E(0 tons/day)
100 200 600 1,300 2,300
300 320 380 480 700
Scenario III•Impose a $40/ton tax on pollution
•Sludge produces A•Northwest produces B•Pollution = 7 tons/day
What is the least costly way to cut pollution by half?
Cost to Sludge Oil($/day)
Cost to NorthwestLumber ($/day)
Chapter 15: The Environment, Health, and Safety Slide 27
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Costs and Emissions for Different Production Processes
Process(smoke)
A(4 tons/day)
C(2 tons/day)
B(3 tons/day)
Cost to Sludge Oil($/day)
D(1 ton/day)
E(0 tons/day)
100 200 600 1,300 2,300
Cost to NorthwestLumber ($/day)
300 320 380 480 700
Scenario IV•Impose a $101/tax on pollution
•Sludge produces B•Northwest produces D•Pollution = 2 tons/day
Scenario IV• Cost = $100 for Sludge & $180 for Northwest = $280 TC
• Cost is $300 less per day than requiring each to cut pollution by half
What is the least costly way to cut pollution by half?
Chapter 15: The Environment, Health, and Safety Slide 28
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Using Price Incentives in Environment Regulation
Taxing PollutionThe advantage of the tax approach is that
it concentrates pollution reduction in the hands of the firms that can accomplish it at the least cost.
A caveat:It can be difficult to determine the optimal tax
rate.
Chapter 15: The Environment, Health, and Safety Slide 29
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Using Price Incentives in Environment Regulation
Auctioning Pollution PermitsSet a target level for pollutionAuction pollution permits to emit that level
Chapter 15: The Environment, Health, and Safety Slide 30
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Using Price Incentives in Environment Regulation
ExampleHow much will pollution permits sell for?
Chapter 15: The Environment, Health, and Safety Slide 31
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Costs and Emissions for Different Production Processes
Process(smoke)
A(4 tons/day)
C(2 tons/day)
B(3 tons/day)
Cost to Sludge Oil
($/day)
D(1 ton/day)
E(0 tons/day)
100 200 600 1,300 2,300
Cost to Northwest
Lumber ($/day)300 320 380 480 700
•Goal is to cut pollution by half to 4 tons/day•No smoke can be emitted without a permit•Government auctions 4 permits for 1 ton/day•Sludge bid: 1 @ $1,000, 2 @ $700, 3 @ $400, 4 @ $100•Northwest bid: 1 @ $220, 2 @ $100, 3 @ $60, 4 @ $20
How much will pollution permits sell for?
Chapter 15: The Environment, Health, and Safety Slide 32
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Costs and Emissions for Different Production Processes
Process(smoke)
A(4 tons/day)
C(2 tons/day)
B(3 tons/day)
Cost to Sludge Oil
($/day)
D(1 ton/day)
E(0 tons/day)
100 200 600 1,300 2,300
Cost to Northwest
Lumber ($/day)300 320 380 480 700
• Government set the opening bid at $90•Sludge will want 4 permits•Northwest will want 2 permits•Total permits is 6
• Government will raise the price until quantity demanded = 4 permits
How much will pollution permits sell for?
Chapter 15: The Environment, Health, and Safety Slide 33
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Costs and Emissions for Different Production Processes
Process(smoke)
A(4 tons/day)
C(2 tons/day)
B(3 tons/day)
Cost to Sludge Oil
($/day)
D(1 ton/day)
E(0 tons/day)
100 200 600 1,300 2,300
Cost to Northwest
Lumber ($/day)300 320 380 480 700
• At $101•Sludge will buy 3 and use B•Northwest will buy 1 and use C
How much will pollution permits sell for?
Chapter 15: The Environment, Health, and Safety Slide 34
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Costs and Emissions for Different Production Processes
Process(smoke)
A(4 tons/day)
C(2 tons/day)
B(3 tons/day)
Cost to Sludge Oil
($/day)
D(1 ton/day)
E(0 tons/day)
100 200 600 1,300 2,300
Cost to Northwest
Lumber ($/day)300 320 380 480 700
• Cost•Sludge = $100 (switching from A to B)•Northwest = $180 (switching from A to D)•Total cost = $280•Savings = $300
How much will pollution permits sell for?
Chapter 15: The Environment, Health, and Safety Slide 35
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Using Price Incentives in Environment Regulation
Advantages of the Auction MethodUtilizes low cost pollution controlDoes not require firms to make costly
investments that they might have to abandon
It allows private citizens to influence the optimal level of pollution abatement
Chapter 15: The Environment, Health, and Safety Slide 36
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Workplace Safety Regulation
What Do You Think?Is safety regulation needed to protect
workers from exploitation?
Chapter 15: The Environment, Health, and Safety Slide 37
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Workplace Safety Regulation
ExampleWill Don and Michael choose the optimal
amount of safety?
Chapter 15: The Environment, Health, and Safety Slide 38
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Workplace Safety Regulation
ExampleScenario
Don and Michael are the only members of a community.
They get satisfaction from: income, safety, and relative income.
They must choose between a: o Safe job @ $50/wko Risky job @ $80/wk
Chapter 15: The Environment, Health, and Safety Slide 39
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Workplace Safety Regulation
ExampleWhich job will they take?
Viewed in isolation, they will choose the safe job.
Chapter 15: The Environment, Health, and Safety Slide 40
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Effect of Concern about Relative Income on Worker Choices Regarding Safety
$80 each$120 for Don
$50 for Michael
$50 for Don$120 for Michael
$90 each
Safe job @ $50/week Risky job @ $80/week
Safe job @ $50/week
Risky job @ $80/week
Don
Michael
When choosing independently:• The dominant strategy for each is the risky job.• Each experience an economic loss of $10.If they choose collectively, they will choose the safe job.They might support safety regulation.
Chapter 15: The Environment, Health, and Safety Slide 41
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Workplace Safety Regulation
ObservationsWhen relative income is a priority, self-
interested actions will not always lead to efficient outcomes in the labor market.
OSHA-style prescriptive safety regulation may create inefficient results.
Chapter 15: The Environment, Health, and Safety Slide 42
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Workplace Safety Regulation
An Alternative to OSHAWorkers Compensation
A government insurance system that provides benefits to workers who are injured on the job.
Chapter 15: The Environment, Health, and Safety Slide 43
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Workplace Safety Regulation
Workers CompensationCreates a financial incentive for employers
to reduce work-place injuriesCurrently, the premiums are not adjusted
to each employer’s safety record
Chapter 15: The Environment, Health, and Safety Slide 44
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Workplace Safety Regulation
Workers CompensationPremiums for employers with good safety
records exceed the claims filed by their employees, & vice versa.
If insurance premiums reflected the full social cost of the injuries of each employer’s workers, the optimal level of safety would be chosen, where MC = MB.
Chapter 15: The Environment, Health, and Safety Slide 45
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Workplace Safety Regulation
Economic NaturalistWhy does the government require safety
seats for infants who travel in cars, but not for infants who travel in airplanes?
Chapter 15: The Environment, Health, and Safety Slide 46
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Public Health and Security
Economic NaturalistWhy do many states have laws requiring
students to be vaccinated against childhood illnesses?
Chapter 15: The Environment, Health, and Safety Slide 47
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Public Health and Security
Economic NaturalistWhy do more Secret Service agents guard
the president than the vice president, and why do no Secret Service agents guard college professors?
Chapter 15: The Environment, Health, and Safety Slide 48
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Differential Investment in Crime Prevention
Number of agents protecting the president
$/ag
ent
MC
NP
MBP
Chapter 15: The Environment, Health, and Safety Slide 49
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Number of agents protecting the vice president
$/ag
ent
MC
NVP
MBVP
Differential Investment in Crime Prevention
Chapter 15: The Environment, Health, and Safety Slide 50
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Number of agents protecting an English professor
$/ag
ent
MC
NVP
MBE
Differential Investment in Crime Prevention