Econ Test 2 PDF

1. Moral Hazard – in the Nyman model, both efficient and inefficient moral hazard exists. (Chapter 6) 2. Nyman model - income transfer not a risk transfer (conventional model) (Chapter 6) Answer to question 1 and 2: 1. Conventional Model of Moral Hazard  Key Concept: Insuranc...

1. Moral Hazard – in the Nyman model, both efficient and inefficient moral hazard exists. (Chapter 6) 2. Nyman model - income transfer not a risk transfer (conventional model) (Chapter 6) Answer to question 1 and 2: 1. Conventional Model of Moral Hazard  Key Concept: Insurance increases inefficient moral hazard. o Once insured, individuals may behave riskier or seek healthcare unnecessarily because:  Healthcare appears cheaper (lower out-of-pocket costs).  No incentive to "shop around" for care. o Outcome: Inefficient use of resources due to frivolous or excessive healthcare consumption.  Demand Analysis: o Nominal Demand: Becomes inelastic (rotates on the demand curve).  Reflects limited price sensitivity once insured. o Conventional thinking focuses on inefficient moral hazard only.  Risk Transfer: o Risk is shared among members of the insurance pool. o Individuals pass their medical risk to others in the pool. 2. Nyman’s Perspective on Moral Hazard  Key Beliefs: o Prioritizes efficient moral hazard over inefficient moral hazard.  Efficient moral hazard means individuals seek necessary care that improves health outcomes.  Examples: Early treatment of chronic diseases, preventing costly complications. o Conventional thinking misinterprets healthcare utilization as "frivolous."  Most care people seek is necessary healthcare, not wasteful.  Efficient Moral Hazard as Income Transfer: o Insurance is not just about transferring risk but also about redistributing income to those in need:  Everyone pays premiums to a pool.   Funds are used to cover costly medical events for those affected. o Example of Income Transfer:  Liver transplant cost = $300,000.  Probability of needing a transplant = 1/75,000.  Premium calculation = $300,000 ÷ 75,000 = $4 added per person’s premium to cover such events.  Utility Trade-Off: o Paying premiums may feel like a utility loss (money could be used elsewhere). o However, in case of a medical emergency, the utility gained (financial relief) far outweighs the loss. 3. Key Takeaways from Nyman’s Model  Universal Healthcare Advocate: o Aims to reduce costs for consumers while ensuring access to necessary care:  Reduce coinsurance (out-of-pocket expenses after insurance).  Introduce cost-sharing measures to prevent abuse of the system.  Include subsidies and gatekeeping mechanisms to balance efficiency and fairness.  Why Universal Healthcare? o Protects individuals from financial ruin due to medical emergencies. o Encourages seeking timely healthcare, improving overall population health. 4. Differences Between Models Conventional Model Nyman’s Model Focuses on inefficient moral hazard. Prioritizes efficient moral hazard. Views healthcare use as frivolous. Views healthcare use as necessary. Emphasizes risk transfer. Emphasizes income transfer. Premium payments = utility loss. Premiums create long-term utility gain. Demand = Inelastic when insured. Healthcare utilization reduces chronic disease risks. 5. Exam Tips  Understand key terms: o Inefficient vs. Efficient Moral Hazard. o Risk Transfer vs. Income Transfer.  Know the difference in perspectives: o Conventional focuses on risks and inefficiency. o Nyman highlights healthcare as a need and promotes universal access.  Real-world application examples: o Use the liver transplant scenario to explain income transfer. o Relate efficient moral hazard to prevention and chronic disease management.  Link concepts to universal healthcare: o Show how Nyman’s ideas align with reducing cost barriers while maintaining system fairness. 3. Market structure characteristics: competitive market, monopoly, oligopoly, monopsony (Chapter 8) 1. Competitive Market  Characteristics: o Many sellers, elastic demand (price-sensitive consumers). o Firms are price takers; no single firm influences the market price. o Barriers to entry/exit are low.  Examples in Healthcare: o Dental beauty and cosmetic treatments (elastic demand). o Generic genetic medications (competitive due to lack of patent protection).  Note: Competitive markets are rare in medicine because healthcare is generally inelastic (demand does not change significantly with price). 2. Monopoly  Characteristics: o Single seller dominates the market; significant market power. o High producer surplus; low consumer surplus. o Barriers to entry include patents, economies of scale, or government regulation.  Examples in Healthcare: o Patent-protected drugs (e.g., exclusive medication rights allow high profits). o Walmart (in non-healthcare context): A dominant player with massive influence. 3. Oligopoly  Characteristics:  o Few dominant firms control the market. o Firms may collude or compete for profit. o Barriers to entry are high, often due to economies of scale or strategic behavior.  Types of Oligopoly: 1. Coercive Oligopoly:  Firms use aggressive tactics to maintain control.  Example: Not typically seen in healthcare. 2. Collusive Oligopoly:  Firms cooperate to set prices or market shares.  Overt Collusion:  Illegal, explicit agreements to manipulate the market (e.g., fixing prices).  Violates the Sherman Antitrust Act, which ensures fair competition.  Tacit Collusion:  Implicit understanding among firms to set similar prices.  Hard to prove legally but still restricts competition. 3. Competitive Oligopoly:  Firms compete aggressively for consumers, leading to price reductions.  Example in Healthcare:  Large hospital systems competing for patients by lowering prices for elective procedures or expanding service options. 4. Monopsony  Characteristics: o Single dominant buyer in the market. o Buyer dictates prices to suppliers.  Examples in Healthcare: o NHS (UK):  Government negotiates for all medical care.  Advantages: Controls costs, makes healthcare affordable.  Disadvantages:  Lower physician wages (e.g., UK doctors earn less than U.S. counterparts).  Limited access to cutting-edge technology or advanced treatment options. o Walmart:  Acts as a monopsony in certain industries, negotiating low supplier prices.  Can create monopolistic conditions in its own sector.  Comparison: o U.S. healthcare features high technology and diverse treatment options because of competition. o UK’s monopsony approach limits such advancements to control costs. Key Takeaways for Exam 1. Understand Market Structures: o Competitive Market = Elastic demand, rare in healthcare. o Monopoly = High producer profits, patents dominate. o Oligopoly = Few firms, different levels of collusion and competition. o Monopsony = Single buyer dictates market, seen in NHS and Walmart. 2. Examples and Applications: o Relate each market structure to healthcare or familiar industries. o Use provided examples (e.g., NHS, patent drugs, Walmart) to illustrate concepts. 3. Legal Implications: o Sherman Antitrust Act prohibits overt collusion in oligopolies.  4. Trade-Offs Between Systems: o Competitive innovation vs. cost control in monopsony models. Text book: 1. Competitive Market  Characteristics: o Many firms with no market power (price takers). o Homogeneous products; perfect substitutes. o No barriers to entry or exit.  Key Dynamics: o Long-run Entry:  New firms entering the market shift the short-run supply curve right, increasing supply.  Results in lower prices and elimination of excess profits. o Long-run Exit:  Firms exiting the market shift the short-run supply curve left, decreasing supply.  Results in higher prices and elimination of economic losses.  Outcomes for Perfect Competition: o Price: Lower prices. o Output: Higher production levels. o Surpluses:  Larger consumer surplus (benefits to buyers).  Smaller producer surplus (benefits to sellers).  Greater total surplus (overall societal welfare). o Efficiency: No deadweight loss; resources are efficiently allocated. 2. Monopoly  Characteristics: o One firm dominates the market as the sole provider. o Barriers to Entry:  Perfect barriers, including:  Exclusive control over necessary inputs.  Sunk costs (irrecoverable investments).  Absolute cost advantages.  Legal restrictions (e.g., licenses, patents). o Market Power:  Monopolist can set prices by restricting output.  Marginal Revenue (MR) is always less than Price (P) due to the downward-sloping demand curve.  Outcomes for Monopoly: o Price: Higher prices. o Output: Lower production levels. o Surpluses:  Smaller consumer surplus.  Larger producer surplus.  Smaller total surplus. o Efficiency: Deadweight loss occurs (inefficient allocation of resources).  Limit Pricing: o Strategy to deter new entrants by setting prices low enough to make entry unprofitable. 3. Oligopoly  Characteristics: o Few dominant firms control the market.  o High barriers to entry (e.g., economies of scale, sunk costs). o Firms are mutually interdependent:  The actions of one firm affect the pricing/output decisions of others.  Types of Behavior in Oligopolies: 1. Collusive  Overt Collusion:  Firms explicitly agree to fix prices or divide markets.  Illegal under antitrust laws (e.g., Sherman Antitrust Act).  Tacit Collusion:  Informal coordination; hard to prove.  Firms follow each other in setting similar prices (e.g., price leadership models). 2. Competitive Oligopoly:  Firms compete aggressively to lower prices, often to marginal cost.  Leads to higher output and efficient allocation of resources.  Outcomes for Oligopoly: o Collusion:  Joint profit maximization; higher prices and reduced competition.  Deadweight loss occurs (misallocation of resources). o Competition:  Prices approach marginal cost.  Resources are efficiently allocated; consumer welfare improves. Key Comparisons Between Market Structures Feature Competitive Market Monopoly Oligopoly Number of Firms Many One Few dominant firms Barriers to Entry None High High Market Power None; firms are price takers High; price maker Shared; mutual interdependence Price Low High Varies: collusion (high), competition (low) Output High Low Varies: collusion (low), competition (high) Consumer Surplus Large Small Medium to small Producer Surplus Small Large Medium to large Total Surplus High (efficient) Small (inefficient; deadweight loss) Varies: collusion (low), competition (high) Deadweight Loss None Yes Often (except in competitive oligopoly) Exam Tips 1. Know the Surpluses and Efficiencies: o Competitive markets maximize total surplus with no deadweight loss. o Monopoly creates deadweight loss by restricting output. o Oligopolies vary depending on collusion or competition. 2. Understand Dynamics of Entry/Exit: o Entry and exit in competitive markets adjust prices to eliminate profits or losses in the long run. o Barriers to entry maintain monopolies and oligopolies. 3. Collusion in Oligopolies: o Understand overt vs. tacit collusion. o Be familiar with price leadership models and competitive outcomes. 4. Real-World Examples: o Use generic drugs for competition, patented drugs for monopoly, and industries like airlines or hospitals for oligopolies. 4. HHI definition (chapter 8) Herfindahl-Hirschman Index measures market power.  This takes the first 100 companies in a particular market and square root it to =10,000. Closer to 10,000-it shows monopoly. Higher the number goes, higher the market power concentration.  Range:  0 to 10,000: o 0: Perfect competition (many small firms). o 10,000: Monopoly (one firm with 100% market share).  Interpretation:  HHI < 1,500: Low concentration (competitive market).  1,500 ≤ HHI < 2,500: Moderate concentration.  HHI ≥ 2,500: High concentration (likely less competitive). 5. Positive/Negative Demand and supply externalities (Chapter 9) 1. Definition of Externality  Externality: o A situation where an individual’s or firm’s actions create costs or benefits for others not involved in the transaction. o Results in deadweight loss due to overproduction or underproduction.  Deadweight Loss (DWL): o A cost to society caused by market inefficiency when supply and demand are out of equilibrium. o Knock-on Effect: Externalities impact not only individuals but also society as a whole. 2. Perspectives in Externalities  Demand Perspective: o Viewed from the household or consumer perspective. o Example: Consumption of goods (vaccines, smoking).  Supply Perspective: o Viewed from the firm or provider perspective. o Example: Production of goods (pollution, scholarships). 3. Key Insights  Positive Externalities: o Generally underproduced in the market. o "Carrot" incentives (e.g., subsidies) are often used to encourage production or consumption.  Negative Externalities: o Generally overproduced in the market. o "Stick" penalties (e.g., taxes, fines, regulations) are used to discourage production or consumption. 4. Demand-Side Externalities  Negative Demand-Side Externalities: o Definition: When private benefits exceed social benefits (MPB > MSB). o Examples: Smoking, alcohol use.  Private individuals gain but society bears costs (e.g., health issues, pollution). o Outcome: Overproduction of these goods. o Government Action: Taxes, penalties, or regulations (e.g., bans on smoking in public spaces).  Positive Demand-Side Externalities: o Definition: When social benefits exceed private benefits (MSB > MPB). o Examples: Vaccinations, universal healthcare.  Society benefits significantly, but individuals may not perceive immediate private gain. o Outcome: Underproduction of these goods. o Government Action: Subsidies, public funding, or mandates to increase availability. 5. Supply-Side Externalities  Negative Supply-Side Externalities: o Definition: When private costs are lower than social costs (MPC < MSC). o Examples: Pollution from factories.  Firms overproduce because they don’t bear the full societal cost of their actions. o Outcome: Overproduction of these goods. o Government Action: Environmental regulations (e.g., EPA oversight, fines).  Positive Supply-Side Externalities: o Definition: When social benefits exceed private costs (MSB > MPC). o Examples: Scholarships for medical students, patents in books.  Both individuals and society gain from increased production or opportunities. o Outcome: Underproduction of these goods. o Government Action: Incentives like scholarships or grants to encourage supply. Key Comparisons Positive Externality Aspect Negative Externality Vaccinations, universal healthcare Demand-Side Smoking, alcohol (overproduced) (underproduced) Pollution, factory waste Scholarships, patents (underproduced) Supply-Side (overproduced) Government Subsidies, incentives Taxes, penalties, regulations Action Exam Tips 1. Understand the Market Trends: o Negative externalities → Overproduc on. o Positive externalities → Underproduc on. 2. Link to Policy Tools: o Negative → Use "s cks" like taxes and penal es. o Positive → Use "carrots" like subsidies and grants. 3. Key Examples for Clarity: o Negative Demand: Smoking (tax). o Positive Demand: Vaccinations (subsidy). o Negative Supply: Pollution (regulations). o Positive Supply: Scholarships (funding). 6. Special interest group theory vs. Public interest theory (Chapter 9). Public Interest Theory  Purpose: o The government intervenes in markets to promote the general interest of society. o Aims to restore efficiency and promote equity in cases of market failure or inequity.  Key Features: o Resource Allocation:  Produce where Marginal Social Benefit (MSB) equals Marginal Social Cost (MSC). o Methods of Intervention:  Redistribution through taxation.  Public programs and community outreach (e.g., Medicaid expansions). o Goals:  Encourage competition.  Provide consumer information.  Reduce harmful externalities.   Redistribute income for enhanced efficiency and equity.  Examples in Action: o Expanding Medicaid to improve healthcare access and population health outcomes. o Laws and regulations aimed at reducing societal harm (e.g., anti-pollution policies). 2. Special Interest Group Theory  Purpose: o Legislation is shaped by the self-interest of special interest groups. o Politicians act as suppliers of legislation, catering to groups that provide funding or votes.  Key Features: o Suppliers of Legislation:  Politicians aim to maximize votes. o Buyers of Legislation:  Wealth-maximizing groups (e.g., industries, lobbying groups) that influence policymakers. o Outcome:  Benefits are concentrated on special interest groups, while costs fall disproportionately on the general public.  Associated Inefficiencies: o Incremental changes (“nickel and dime” policies) prevent noticeable consumer resistance. o Legislation often prioritizes group interests over societal efficiency.  Example: Sugar Tax o Potential: Could generate significant revenue and reduce sugar consumption. o Reality: Sugar companies lobby Congress to block or delay the tax, protecting their profits but harming public health. Key Comparisons Special Interest Group Theory Aspect Public Interest Theory Specific groups’ self-interest Focus Society’s general interest Vote-maximizing politicians and lobbying Key Drivers Efficiency and equity groups Special interest groups Beneficiaries General public Cost Shared equitably through taxation or public Disproportionately on the general public Distribution programs Blocking sugar taxes, subsidies for certain Medicaid expansion, environmental Examples industries regulation Exam Tips 1. Understand Goals of Each Theory: o Public interest theory focuses on societal welfare. o Special interest group theory explains inefficiencies due to lobbying. 2. Key Examples: o Use Medicaid expansion for public interest theory. o Use the sugar tax example for special interest group theory. 3. Compare and Contrast: o Highlight how each theory explains government action differently. 7. Definition of a Public Good (Chapter 9) 1. Characteristics of Public Goods  Non-Rivalry in Consumption:  o One person’s use of the good does not reduce the quantity available for others. o Example: A public park—anyone can enter without preventing others from using it.  Non-Excludability: o It is too costly or impractical to exclude individuals who do not pay from benefiting. o Example: Clean air—everyone can breathe it regardless of payment.  Production Challenges: o Private Firms:  Unwilling to produce public goods due to the inability to charge everyone who benefits (free-rider problem). o Solution:  Public goods are typically funded through taxation and may be produced in either the public or private sector. 2. Healthcare as a Non-Public Good  Healthcare is Rival: o If one person consumes a healthcare service (e.g., a doctor’s time or a hospital bed), it is no longer available for others. o Unlike true public goods, healthcare resources are limited and competed for.  Economic Implications: o Excludability: Healthcare providers can exclude individuals who cannot pay (e.g., through insurance systems). o Private Market Dominance: Most healthcare services are provided in private markets due to rivalry and excludability. Key Comparison: Public Goods vs. Healthcare Healthcare Feature Public Goods Yes (consumption does not reduce No (limited resources; competed for) Non-Rivalry supply) Non- No (can exclude non-paying individuals) Yes (difficult/costly to exclude users) Excludability Mixed funding: private, insurance, and public Provision Often funded through taxation systems Doctor visits, hospital beds Examples Public parks, clean air Exam Tips 1. Understand the Definition of Public Goods: o Highlight the roles of non-rivalry and non-excludability. 2. Key Healthcare Contrast: o Explain why healthcare is not a public good (it is rival and excludable). 3. Examples: o Use public parks for public goods. o Relate healthcare to private goods to reinforce the distinction. 8. Concept of Williamson merger trade-off model (Chapter 9 – pg. 29 of ppt slides) In the slide the graph showed two horizontal merger (two hospital merging). The average cost goes down. The concept of Williamson merger trade-off model states the if there is a consolidation of any type, always have to do case by case basis. (Can’t say all merger is bad or good, it generally just depends) 9. Medicare: crowding out, know the parts of Medicare, Medicaid and expansion, Macra and MIPS (Chapter 10)  1. Medicare  Purpose: A federal health insurance program for people aged 65 and older or certain younger individuals with disabilities.  Funded by: Social Security. Parts of Medicare:  Part A: o Mandatory coverage. o Covers catastrophic care like hospital stays, skilled nursing facilities, and hospice care.  Part B: o Supplemental coverage. o Covers outpatient care, preventive services, and medical supplies. o Funded partially by trust funds; premiums have risen over time.  Part C (Medicare Advantage): o Alternative option allowing beneficiaries to contract with private insurance firms approved by Medicare. o Often affects drug coverage and additional services.  Part D: o Covers pharmaceutical drugs and prescription medications. Other Aspects of Medicare:  MACRA (Medicare Access and CHIP Reauthorization Act): o Replaced the Sustained Growth Rate (SGR) reimbursement model. o Shifted focus from volume-based care to value-based care. o Ensures quality of care is prioritized over the number of patients treated.  MIPS (Merit-Based Incentive Payment System): o Adjusts Medicare payments based on provider performance in areas like quality, cost, and efficiency. o Encourages value-based care under CMS. 2. Medicaid  Purpose: Provides health coverage to individuals and families below the poverty line.  Funded by: Federal and state governments through tax collection. Crowding Out Effect:  Definition: Occurs when public programs like Medicaid expand eligibility, causing individuals to leave private insurance for public options.  Result: o Shrinks the private insurance risk pool. o Increases private premiums due to fewer participants sharing costs. o Seen more frequently with Medicaid expansion initiatives. Key Comparisons: Medicare vs. Medicaid Medicaid Aspect Medicare Individuals/families below poverty line Who it serves People 65+ or with specific disabilities Taxes (federal and state) Funding Social Security Based on income level Eligibility Based on age/disability Low-income medical care, children’s Coverage Catastrophic care, outpatient services, programs examples drugs Exam Tips 1. Understand Medicare’s Parts: o Part A = Hospital, Part B = Outpatient, Part C = Private plans, Part D = Drugs. 2. Know the Crowding Out Effect:  o Expansion of public insurance → Shrinkage in private insurance. 3. Link Programs to Value-Based Care: o MACRA and MIPS aim to enhance efficiency and quality in Medicare. 10. Understand the Dominant firm pricing model (Chapter 11) Market Structure: Dominant Firm with Fringe Firms  Dominant Firm: o The leading firm in the market with the largest market share. o Sets the price for the industry based on its cost structure and market power. o Price determined where Marginal Revenue (MR) = Marginal Cost (MC) for maximum profit. o Has low total cost and high total revenue.  Fringe Firms: o Smaller competitors in the market. o Act as price takers, meaning they accept the price set by the dominant firm. o Their price equals Marginal Cost (P = MC). o Limited influence on overall market prices. Market Dynamics 1. Price Pressure: o Downward price pressure occurs as more fringe firms enter the market. o Greater competition reduces the dominant firm’s pricing power. 2. Elasticity Effect: o When demand is elastic, increased competition or substitute availability also lowers the price set by the dominant firm. Key Concepts 1. Dominant Firm Pricing Rule: o Dominant firm maximizes profit by setting price where MR = MC. 2. Fringe Firms' Behavior: o Price equals marginal cost (P = MC). o They adjust output based on the price set by the dominant firm. 3. Market Influence: o The dominant firm’s price leadership diminishes as fringe firms grow in number or market share. Exam Tips 1. Understand how dominant firms interact with fringe firms. o Dominant firms set prices; fringe firms are price takers. 2. Be able to explain the relationship between competition, elasticity, and pricing power. 3. Know that more fringe firms = downward pressure on dominant firm pricing. 11. Supplier Induced demand (chapter 12) Medical association represents doctors, so they are lobbing nurse practitioners and Pas. Physician extenders are shifting wages of physicians. To fix this they do induced demand, physicians can induce additional demands to make their wage higher