1. MBMC The Environment, Health, and Safety

2. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 2 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.

3. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 3 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.

4. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 4 Introduction What Do You Think? Was the opponents argument based on sound economic logic?

5. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 5 The Economics of Health Care Delivery Healthcare Spending (% of National Income) 1940 -- 4% 2005 -- 14% Reasons for the Increase in Cost Technology Third-party payment system

6. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 6 The Economics of Health Care Delivery Applying the Cost-Benefit Criterion The 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.

7. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 7 The Economics of Health Care Delivery Applying the Cost-Benefit Criterion The third-party payment system has virtually eliminated the cost-benefit test from the medical services market.

8. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 8 The Economics of Health Care Delivery Example How long should David stay in the hospital?

9. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 9 The Demand for Hospital Care Length of hospital stay (days) Price ($/day) 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.

10. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 10 The Economics of Health Care Delivery Example How much waste does full insurance coverage cause?

11. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 11 The Waste That Results from Full Insurance Coverage Length of hospital stay (days) Price ($/day) 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

12. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 12 The Waste That Results from Full Insurance Coverage Length of hospital stay (days) Price ($/day) 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.

13. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 13 The Economics of Health Care Delivery First-dollar Insurance Coverage Insurance 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

14. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 14 The Economics of Health Care Delivery Designing a Solution Measuring 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

15. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 15 The Economics of Health Care Delivery Designing a Solution Measuring price elasticity of demand for health care (experiment on two groups)  Findings oGroup 2 consumers purchased 40% - 50% less health care than Group 1 oNo measurable differences in health outcomes

16. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 16 The Economics of Health Care Delivery Designing a Solution Measuring price elasticity of demand for health care (experiment on two groups)  Policy Implications oAdopt a system of high deductible health insurance oUse stipend payments for the poor oAn efficient policy will increase the size of the health care pie

17. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 17 The Economics of Health Care Delivery Economic Naturalist Why 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?

18. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 18 The Economics of Health Care Delivery Economic Naturalist In the richest country on Earth, why do so many people lack basic health insurance?

19. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 19 The Economics of Health Care Delivery Economic Naturalist The 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.

20. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 20 The Economics of Health Care Delivery Economic Naturalist A Possible Solution  A government reimbursement of $5,000 to each family  Cost would be $350 billion/yr  Higher taxes offset by higher salaries and reductions in high cost care for the uninsured

21. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 21 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.

22. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 22 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.

23. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 23 Using Price Incentives in Environment Regulation Example What is the least costly way to cut pollution by half?

24. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 24 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 ($/day) D (1 ton/day) E (0 tons/day) 1002006001,3002,300 Cost to Northwest Lumber ($/day) 300320380480700 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?

25. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 25 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) 1002006001,3002,300 300320380480700 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 Northwest Lumber ($/day)

26. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 26 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) 1002006001,3002,300 300320380480700 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 Northwest Lumber ($/day)

27. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 27 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 ($/day) D (1 ton/day) E (0 tons/day) 1002006001,3002,300 Cost to Northwest Lumber ($/day) 300320380480700 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?

28. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 28 Using Price Incentives in Environment Regulation Taxing Pollution The 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.

29. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 29 Using Price Incentives in Environment Regulation Auctioning Pollution Permits Set a target level for pollution Auction pollution permits to emit that level

30. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 30 Using Price Incentives in Environment Regulation Example How much will pollution permits sell for?

31. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 31 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 ($/day) D (1 ton/day) E (0 tons/day) 1002006001,3002,300 Cost to Northwest Lumber ($/day) 300320380480700 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?

32. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 32 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 ($/day) D (1 ton/day) E (0 tons/day) 1002006001,3002,300 Cost to Northwest Lumber ($/day) 300320380480700 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?

33. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 33 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 ($/day) D (1 ton/day) E (0 tons/day) 1002006001,3002,300 Cost to Northwest Lumber ($/day) 300320380480700 At $101 Sludge will buy 3 and use B Northwest will buy 1 and use C How much will pollution permits sell for?

34. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 34 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 ($/day) D (1 ton/day) E (0 tons/day) 1002006001,3002,300 Cost to Northwest Lumber ($/day) 300320380480700 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?

35. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 35 Using Price Incentives in Environment Regulation Advantages of the Auction Method Utilizes low cost pollution control Does 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

36. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 36 Workplace Safety Regulation What Do You Think? Is safety regulation needed to protect workers from exploitation?

37. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 37 Workplace Safety Regulation Example Will Don and Michael choose the optimal amount of safety?

38. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 38 Workplace Safety Regulation Example Scenario  Don and Michael are the only members of a community.  They get satisfaction from: income, safety, and relative income.  They must choose between a: oSafe job @ $50/wk oRisky job @ $80/wk

39. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 39 Workplace Safety Regulation Example Which job will they take?  Viewed in isolation, they will choose the safe job.

40. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 40 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/weekRisky 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.

41. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 41 Workplace Safety Regulation Observations When 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.

42. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 42 Workplace Safety Regulation An Alternative to OSHA Workers Compensation  A government insurance system that provides benefits to workers who are injured on the job.

43. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 43 Workplace Safety Regulation Workers Compensation Creates a financial incentive for employers to reduce work-place injuries Currently, the premiums are not adjusted to each employer’s safety record

44. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 44 Workplace Safety Regulation Workers Compensation Premiums 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.

45. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 45 Workplace Safety Regulation Economic Naturalist Why does the government require safety seats for infants who travel in cars, but not for infants who travel in airplanes?

46. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 46 Public Health and Security Economic Naturalist Why do many states have laws requiring students to be vaccinated against childhood illnesses?

47. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 47 Public Health and Security Economic Naturalist Why do more Secret Service agents guard the president than the vice president, and why do no Secret Service agents guard college professors?

48. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 48 Differential Investment in Crime Prevention Number of agents protecting the president $/agent MC NPNP MB P

49. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 49 Number of agents protecting the vice president $/agent MC N VP MB VP Differential Investment in Crime Prevention

50. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health, and Safety Slide 50 Number of agents protecting an English professor $/agent MC N VP MB E Differential Investment in Crime Prevention

51. MBMC End of Chapter End of Chapter