Ch 7 & 8, 17

Question 1

Define– Allocative efficiency.

sometimes used interchangeable with pareto efficiency

Answer 1

A situation in which the factors of production have been allocated so as to reflect what people demand (i.e. demand matches supply). Social welfare is maximized as MB = MC in all markets and there can be no substitution between markets to increase welfare beyond its current level.

Question 2

Define– Market equilibrium.

Answer 2

A situation where the price in a given market is such that the quantity demanded is equal to the quantity supplied.

When all participants are satisfied.

Question 3

Define– Pareto efficiency.

Answer 3

A situation in which there is no way of making any person better off without making someone else worse off (a point on the production possibilities frontier).

Question 4

Define– Perfect competition.

Answer 4

A market in which there are many suppliers, each selling an identical product and many buyers who are completely informed about the price of each supplier’s product, and there are no restrictions on entry into the market.

Question 5

Define– Price taker.

Answer 5

A supplier that cannot influence the price of the good or service they supply.

Question 6

Define– perfectly competitive market

Answer 6

a market in which there is no intervention or regulation by the state, except to enforce private contracts and the ownership of property

or “free market”

Question 7

Define– technical efficiency

sometimes used interchangeable with operational efficiency

Answer 7

A technically efficient position is achieved when the maximum possible improvement in outcome is obtained from a set of resource inputs

Question 8

Define– Productive efficiency [economic efficiency]

Answer 8

refers to the maximisation of health outcome for a given cost, or the minimisation of cost for a given outcome.

Question 9

what are the conditions for a perfectly competitive market to operate efficiently?

Answer 9

producers selling the same product (homogeneity)
• many sellers and buyers;
• no restrictions on potential sellers entering the market;
• buyers and sellers well informed about prices

Question 10

What are the advantages of markets in the allocation of resources?

Answer 10

1 Automatic. In theory at least, markets automatically tend towards a situation of equilibrium where the output produced is exactly equal to the output used.

2 Allocatively efficient. Given a few specific requirements, markets will produce an output that is allocatively efficient – that is, each unit of output is produced when the additional benefit it brings exceeds its cost.

3 Responsive to change. The market is dynamic: it is a ‘powerful and efficient information system’. Changes in people’s preferences are quickly passed on to and acted on by producers. Likewise, changes in the availability of and cost of resources are reflected in prices. Cheaper substitute resources are quickly opted for instead

Question 11

define– Adverse selection.

Answer 11

Adverse selection. When a party enters into an agreement in which they can use their own private information to the disadvantage of another party.

In the case of insurance, if someone thinks they are a low risk then they are less likely to take up insurance than someone who believes themselves to be a high risk.This will mean that only high-risk people will pool their risks and low-risk people will not.This is known as adverse selection. Of the informed group (individuals who know their own health risk), only those who will benefit most from an agreement will enter the agree- ment, to the detriment of the uninformed person (the insurer)

Question 12

define– Asymmetry of information.

Answer 12

Asymmetry of information. A market situation where all participants do not have access to the same level of information.

Question 13

define– Deadweight loss.

Answer 13

Deadweight loss. The loss in allocative efficiency occurring when the loss of consumer surplus outweighs the gain in producer surplus.

Question 14

define– Externality.

Answer 14

Externality. The cost or benefit arising from an individual’s production or consumption decision which indirectly affects the well-being of others.

Question 15

define– Market failure.

Answer 15

Market failure. A situation in which the market does not result in an efficient allo- cation of resources.

Question 16

define– Monopoly power.

Answer 16

Monopoly power. The ability of a monopoly to raise price by restricting output.

Question 17

define– Moral hazard.

Answer 17

Moral hazard. A situation in which one of the parties to an agreement has an incentive, after the agreement is made, to act in a manner that brings additional benefits to themselves at the expense of the other party.

Question 18

define– Natural monopoly.

Answer 18

Natural monopoly. A situation where one firm can meet market demand at a lower average cost than two or more firms could meet that demand.

Question 19

define– Public good.

Answer 19

Public good. A good or service that can be consumed simultaneously by everyone (non rival) and from which no one can be excluded (non-excludable).

Question 20

define– Social cost.

Answer 20

Social cost. The total costs associated with an activity including both private costs and those incurred by society as a whole.

Question 21

define– Supplier-induced demand.

Answer 21

Supplier-induced demand. The demand that exists beyond what would have been asked by consumers if they had been perfectly informed about their health problems and the various treatments available.

Question 22

define– Transaction costs.

Answer 22

Transaction costs. Costs of engaging in trade – i.e. the costs arising from finding someone with whom to do business, of reaching an agreement and of ensuring the terms of the agreement are fulfilled.

Question 23

what are some market failures in the healthcare market?

Answer 23

monopoly, externalities, public goods and asymmetry of information.

Question 24

what conditions can result in a monopoly (single supplier)?

Answer 24

• no close substitutes (emergency CS)
• barriers to entry (licensing boards, limits doctors, makes salaries higher)
• few providers (lack of hospitals in rural areas)

Question 25

what are some policy responses to monopolies

Answer 25

price control
break up monopolies
get firms to compete for monopoly power (who’s offering lowest price)

Question 26

what are policy responses to externalities

Answer 26

internalizing externalities
positive externalities (not enough of a good thing)
– subsidies to encourage it
negative externalities (too much of a bad thing)
– taxes to discourage it

Question 27

what are 2 methods insurance companies use to reduce moral hazard?

Answer 27

• • reducing premiums for people who have made no claims in previous similar transactions.
• • deductibles, copayments. a form of cost sharing.

Question 28

in the model of demand, what does it mean for a consumer/ patient to be sovereign?

Answer 28

• bears the costs and receives the benefits
• purchase treatments where benefit exceeds the cost
• judge the cost and benefits of treatments.

in reality patient sovereignty is limited

Question 29

what are the market failures of the 3 relationships below:

• patient – insurance payer
• doctor – patient
• doctor – insurance payer

Answer 29

• pt– payer. consumer moral hazard. asymmetric information.
• doctor– pt. imperfect agency. (doctor is the pt’s agent, supposedly working in the best interest of the pt)
• doctor– payer. provider moral hazard (supplier induced demand)

Question 30

define – Equity

Answer 30

Equity. A policy objective which seeks to establish fairness in the allocation of resources. It is often, though not exclusively, defined by an objective based on equality in the distribution of health, health care or access to health care across population groups.

The fairness by which resources, health and health care are distributed

Question 31

define – Equity–efficiency trade-off.

Answer 31

Equity–efficiency trade-off. The usual conundrum in which policies aimed at achieving a more equitable share of resources often are not the most efficient options and thus result in less to share overall.

Question 32

define – Horizontal equity.

Answer 32

Horizontal equity. Equal treatment of equals (e.g. equal access for equal need).

Question 33

define – Resource allocation formula.

Answer 33

Resource allocation formula. A formula that uses indicators of the relative need for health services to guide resource allocation decisions in an effort to achieve equity of funding across geographic areas.

Question 34

define – User fees.

Answer 34

User fees. Formal out-of-pocket expenditures incurred by patients at the time of health care use.

Question 35

define – Vertical equity.

Answer 35

Vertical equity. Unequal (but fair) treatment of unequals (i.e. individuals who are unequal should be treated differently according to their level of need).

Treating people differently when the level of need among them differs

Question 36

what are 3 popular ways of defining horizontal equity in healthcare?

Answer 36

• equal health care expenditure for equal need.
• equal access to health care for equal need;
• equal use of health care for equal need;

Question 37

what are some challenges to making “equal health” a goal?

Answer 37

• • genetics
• • paternalistic, bc some people choose lifestyles that are unhealthy
• • if resources are limited, then may need to lower some ppl’s health to elevate others
• • no consensus on definition of “good health”

Question 38

Equality of access requires what for different communities?

Answer 38

a) Travel distance to facilities and services is the same.
b) Transport and communications services are the same.
c) Waiting times are the same.
d) Patients are equally informed about the availability and effectiveness of treatments.
e) Charges are the same and ability to pay is the same.

Question 39

what are some limitations of equality of expenditure?

Answer 39

• • everyone is getting the same amount, but you will get different outcomes
• • depending on definition of equity, will get different outcome
• • things cost different in different places
• • vertical equity requires a lot of data that may not be available

Question 40

what are some examples of trade offs between equity and efficiency?

Answer 40

• – higher income tax with disencentivize ppl to work or save
• • centralizing health care may get rid of redundant clinics and create longer travel distance to care
• • money taken from rich, don’t always end up in hands of the poor
• • user fees to decrease consumer moral hazard would be a greater burden to poor

Question 41

what are some inefficiencies related to govt intervention?

Answer 41

• • financing programs diverts money from other areas. levying large taxes can create losses to the public and may not be worth it
• • administrative costs
• • politicians acting in their own interest
• • hard to replace influencing powers of market forces with a group of civil servants