Public Goods, Externalities, and the Role of Government, continued… What about health care? Bruno Palier
Outline • Is Health a public good? • Let us look at Health care market • Superior good/imperfect market
OPTIMAL PROVISION OF PUBLIC GOODS • Pure public goods have two traits: – They are non-rival in consumption: The marginal cost of another person consuming the good is zero, and does not affect your opportunity to consume the good. – They are non-excludable: There is no way to deny someone the opportunity to consume the good.
Defining pure public goods Is the good rival in consumption?
Is the good excludable?
Yes
No
Yes
Ice cream (private good)
Cable tv
No
Crowded city sidewalk
National defense (public good)
What about Health care provision? Doctor’s consultation, treatment, drugs… And Health insurances? -Marginal cost of another person consuming the good? -Does not affect your opportunity to consume the good? -There is no way to deny someone the opportunity to consume the good?
Defining pure public goods Is the good rival in consumption? Yes Yes
Is the good excludable?
No
Health care provision Health insurances
No
• However, Is health care provision (doctors visit, treatment…) a normal good?
Demand and supply curves (Francesco’s Grandmother Economics)
• Demand curve is the relationship between the price of a good and the quantity demanded. – Derived from utility maximization – Downward-sloping because of the principle of substitution among goods
• Supply curve is the relationship between the price of a good and the quantity supplied. – Derived from profit maximization problem. – Upward-sloping because of the principle of increasing cost.
Demand and supply curves What about health care services? • Demand curve is the relationship between the price of a good and the quantity demanded. – – – –
Derived from utility maximization Downward-sloping? The Demand is indefinite: I do not want to die Hence my demand will never be satisfied, and I will always ask for more, if more is offered.
Health care might be a superior good • The Demand increases with increase in
income
– The richer I am, a larger share of my budget will be devoted to health – This is also true for countries: a richer is a country, more will be spent on health – Let See at some data provided by Lise Rochaix
Total health care expenditure
Health care expenditure rise as a % of GDP between 1960 and 1997 Selected countries
15
USA
DEU CHE FRA CAN
10 % GDP
LUX
5
0 1960 Eco-Santé OCDE 99
1970
1980
1990
1997
National wealth
A positive and statistically significant relationship between health care expenditure per capita and GDP
An income elasticity greater than 1 (implying that as GDP increases by 1%, health care expenditure increases by more than 1%)
National wealth Relationship between national wealth (per inhabitant) and health care expenditure (per capita) in OCDE countries (1997) 4000
Dépenses tot. Santé /capita, Euros PPA
3000
2000
1000
0
0
Coeff. corrélation : 0.86 Eco-Santé OCDE 2000
10000
20000
Références macro-éco. PIB /capita, Euros PPA
30000
40000 Pente : 0.10 Constante : -308.35
It is a superior good… But
The mere level of wealth cannot explain the consumption of health care, There are other determinants: – demographics, – technology, – And the supply!!! – the way health care systems are organized
Supply curves An imperfect market… • Supply curve is the relationship between the price of a good and the quantity supplied. – profit maximization problem: Doctors want to save life, but they also want to make money… – Imperfect market: Asymmetry of information – Induced Demand – Do we need all the treatments we receive?
Let us compare level of spending and level of health (cost efficiency)
It may not be efficient to give it to the market
• The more a system is publicly financed, the more cost efficient it is… • i.e. best health of the population for relatively modest level of spending (Sweden, Japan) • What is at stake: - Personal habits, quality of environment, - and the way the health care system is organized: Modes of Payment of doctors, control of patients and doctors practices, filtering and hierarchizing level of health care
• Hence a need to at least organize the market • If you add a political goal: equal access to health care • A need to provide public financing and regulation, to avoid: • People’s Myopia • And selection of risks by private insurances
