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Lecture: Role of Government Chapter 19. Outline Types of Government Intervention Types of Goods Reasons for Public Intervention Government Failure

Mar 31, 2015



  • Slide 1

Lecture: Role of Government Chapter 19 Slide 2 Outline Types of Government Intervention Types of Goods Reasons for Public Intervention Government Failure Slide 3 Recap Last time talked about market failure Markets are problematic in health care because 1. Dont provide goods efficiently 2. Dont provide good equitably Slide 4 Types of Government Intervention 1. Inform: or persuade consumers/providers/suppliers to act in a certain way. Publicize health risks (smoking) Disseminate information on disease patterns (swine flu), or risks of medical procedures. Slide 5 Types of Government Intervention 2. Regulation: determines how a private activity may be undertaken. At extreme govt can prohibit goods or activities. Setting standards for doctors and drug trails Regulate insurers to provide certain interventions. Includes mandates: obliges someone to do something, and (usually, though not always) pay for it. E.g. employers of a certain size must provide health insurance, children must be immunized at schools Slide 6 Types of Government Intervention Regulation and mandates appeals to legislators b/c tackles problems without incurring government spending. Affects spending of those that are regulated e.g. two day hospital days after delivery. 4. Finance: health care with public funds. Delivery can still be public. Slide 7 Types of Government Intervention 5. Provide: or deliver health services using publicly-owned facilities and civil service staff. Usually publicly financed and provided More typical of developing countries Developed countries usually provide a lot of autonomy if publicly provided (crown corporations). 6. Taxes/subsides on goods e.g. cigarettes With diabetes increasing so quickly should certain foods be taxed more? Slide 8 Types of Goods Public Goods: 2 qualities Nonrival: someones consumption does not reduce the amount available for others to consume. Control of disease vectors (malaria) Food and water safety Non-excludable consumer cannot be excluded from consuming the good either by having to pay or through some other mechanisms. Classic example national defense. Slide 9 Types of Goods Merit Goods: good that are thought to be good for someone regardless of the persons own preferences. Compulsory education. Wearing seat belts or helmets on motor cycles. Tobacco and drugs. Market failure because dont consume enough of it. Slide 10 Rational for government intervention Governments often try to correct market failures (market distortions). Remember the theory of the second best, fixing the distortion wont necessarily make people better off (may or may not). Need to think about when government intervention may be appropriate. Can sometimes be a value judgement. In health care governments are not aiming for perfect competition because not achievable for much of health care. Instead use other mechanisms than a price mechanism to ration health care. Slide 11 Rational for government intervention 1. Public Goods: Market failure because too little of the good is produced in private markets. Usually large number of individuals. Individuals unlikely to cooperate to fund substantial amounts of public goods through voluntary contributions. Free-riders: cant exclude them from the benefits, but free-ride b/c an voluntary contribution has a negligible impact on availability. Government takes responsibility for providing good. E.g. control of disease vectors (malaria), clean air, food and water safety, information, medical research (some types), information, voluntary giving (redistribution) Slide 12 Rational for government intervention 2. Externalities: Goods that have third-part effects. When a third party is affected by another persons consumption or production of a good. And price mechanisms to compensate these people. E.g. neighbors loud music, smoke, air pollution, contagious diseases (SARs, Bird Flu) Problem is that externalities are not reflected in the price of a good. Factories dont pay extra because they made the air dirty (hopefully in the future they will). Slide 13 Rational for government intervention MC: Marginal Cost = Price Supply Curve Price Health Care D: Demand curve or private marginal benefit curve. MEB: Marginal external benefit MSB: Marginal Social Benefit QmQm Q opt Case of immunizations Efficient point for society Slide 14 Rational for government intervention MC Price Health Care D MEB MSB QmQm Q opt Case of immunizations MC with subsidy Policy Response: Subsidize price of good. Slide 15 Rational for government intervention Are subsidies to producers passed onto consumers? Depends on the slope of the demand and supply curves. P1P1 P 1 -S P2P2 S1 S2 : after subsidy D P Q P Q Consumer and producer benefits Only consumer benefits Slide 16 Rational for government intervention Policy Options for Externality: For negative externalities (air pollution, dumping feces into water supplies) Subsidy Regulation and mandates (laws). Public provision/finance of some goods immunizations in developing countries have vaccination campaign days and weeks disease surveillance Charitable externality: can be sufficiently important to justify large social insurance programs. Slide 17 Rational for government intervention 3. Incomplete Markets: E.g. Insurance companies dont want to insure you for pre-existing diseases (cancer, AIDS). Cant buy insurance. Policy Options: Could use mandates that make insurance companies cover these people. May need to subsidize drugs or care. Could provide care. Slide 18 Rational for government intervention 4. Merit Goods Use argument everyone should have access to health care. Why many developing countries have free access to medical care (even if cant afford to provide it). Why you see universal health care systems. Slide 19 Rational for government intervention 5. Market Power Monopolies, oligopolies etc. Any industry where the supply or marginal cost curve is not flat (so are not price takers) E.g. Hospital, drug companies (patents), specialists, Often create market power by differentiating products. E.G specializing in different kinds of operations. Produce less and charge more than a competitive market. Due to economies of scale, production may be more efficient if you have a monopoly (natural monopoly) E.g. power sector, hospital, medical research Slide 20 Rational for government intervention Policy options for market power Regulate May set maximum prices. Negotiate prices with drug companies and doctors. Mandate longer hospital stays (deliveries, started to only insure 1 night stays, it was mandated that woman could stay 2 nights. Public provision. Slide 21 Government Involvement in US Support for hospitals Started under the Hill Burton Act in 1946 Idea was to expand rural health facilities by providing matching grants to non-profit institutions. Requires states to survey its hospital needs and develop a statewide plan for construction of public hospitals. State, county and municipal hospitals account for 20 % of total hospital beds. Slide 22 Government Involvement in US The Veterans Administration & Champus Largest public provider of health care in US. Provide care for veterans Retired military personal and dependants. Food and Drug Administration Started in 1906 Regulates drugs quality. Slide 23 Government Involvement in US Mandated Health Insurance Benefits. Insurance industry is regulated at the state level. Tradition role is to ensure solvency of insurance companies. Mandate insurance benefits. In 1970, 48 mandates in 1991 1,000, in 1997, 600 new ones. Often are due to special interest groups. Some research has found that they prevent insurers from offering low-cost alternatives. Slide 24 Government Involvement in US Tax Policy Employer contribution to health insurance not part of taxable income. Individual payments for health insurance and care can be itemized and deducted if amount large enough. HAS These subsidies do not promote equity, go to those who can afford the most health care. Slide 25 Government Involvement in US Public Health Department of Public Health Center for Disease Control Financing Health Insurance Medicare and Medicaid Finance Medical Education and Research Institutes of Health (provides grants) Slide 26 Government Failure What is the extent and form of government involvement? Hard to agree on objectives, choose from different policy instruments, and select the correct value of these instruments. These difficulties could lead to government failure. Slide 27 Government Failure Economists tend to treat government as a benevolent despot who knows what is good for the economy and regulates accordingly 1. Theory of Local Capture: Some argue that politicians are like everyone else, they want to maximize how many votes they get. So instead of doing what is good for the economy, may do what is good for some special interest group. May reward voters with monopoly profits, or public goods (common to build a hospital in your name in developing countries, beneficial regulation Slide 28 Government Failure Consumers could band together to be a special interest group but tend not to because difficult to agree on one interest, and due to free-rider issue. Criticisms of capture theory Assumes all public officials are solely self- interested which is not the case. Leaves little room for ideology in politics. People assumed to do what special interest groups want even if doesnt follow party platform Slide 29 Government Failure 2. Bureaucracy and efficiency Government is a monopoly so if tries to provide goods will it do so at the minimum cost. Government run by politicians who tend to prefer quick fixes rather than longer-term solutions. Some of these criticism could also be made of the private market. They do quick fixes when cleaning up environmental spills. Not all managers are trying to maximize company profits, they may be trying to maximize their salaries, or length of stay in the job. Slide 30 Government Fa