Transcript
454Miller•Economics Today, Nineteenth Edition
Chapter 30Income, Poverty, and Health Care455
Answers to Questions for Class Critical Analysis
Pitfalls in Contemplating the Distribution of Households across Income Ranges (p. 672)
Why do you suppose that choosing other income increments besides $15,000 or $30,000 can yield even more distributional variations of households within these seven income groupings? (Hint: What do you think could happen if one were to broaden the income increments to $100,000 or narrow them to $5,000 while holding the number of income groups equal to seven?)
If one were to broaden the income increments or narrow them without changing the number of income groups, then the distribution of households within these seven income groups would be different from the income increments of $15,000 or $30,000.
Trying to Close the Parental “World Gap” between Rich and Poor with “Nudges” (p. 676)
What do you think motivates proposals to require sellers of disposable diapers to print messages on diapers encouraging parents to tell stories to or read to their babies or young children?
Requiring sellers of disposable diapers to print messages on diapers would encourage parents to tell stores to or read to their babies or young children. This would potentially reduce the “word gap” effects when higher-income and lower-income families.
A Few Medications Account for a Large Share of Medicare Drug Spending (p. 684)
Who provides the more than $100 billion that Medicare spends on prescription drugs each year?
Taxpayers provides the more than $100 billion that Medicare spends on prescription drugs each year.
You Are There
Choosing Not to Purchase Health Insurance (p. 686)
1. Who do you think provides funds to cover emergency room expenses for an uninsured patient who pays the annual $250 health-law penalty but fails to pay the emergency room’s charges?
Other patients, such as insured patients, provide funds to cover emergency room expenses for uninsured patients who fail to pay the emergency room’s charges.
2. Could it be rational for someone to choose to be uninsured and pay the annual $250 penalty? Explain your reasoning.
It would be rationale for someone to choose to be uninsured and pay the annual $250 penalty if the total cost of buying health insurance (less the saving from the $250 penalty) is more than the total benefit from buying the insurance.
Issues and Applications
Do Antipoverty Programs Contribute to Poverty by Penalizing Marriage?
(pp. 687–688)
1. How might a state such as Arkansas adjust its administration of income maintenance programs to reduce or eliminate the marriage penalty? (Hint: What if the state were to base program’ benefits on total dollars of income received by both adults combined whether or not they were married?)
A state could reduce or eliminate the marriage penalty by providing benefits based on total dollar of income received by both adults combined regardless of their marriage status.
2. Why do you suppose that observers have proposed redesigning income maintenance programs to provide a “marriage premium” via extra benefits if adults with children marry?
Providing a “marriage premium” via extra benefits if adults with children marry would give people incentives to marry.
Research Project
1. To see recent estimates of marriage penalties in antipoverty programs, see the Web Links in MyEconLab.
2. To learn about the complications involved in determining one’s earned income tax credit depending on martial status, see the Web Links in MyEconLab.
Answers to Problems
30-1. Consider the graph at the right, which depicts Lorenz curves for countries X, Y, and Z.
a. Which country has the least income inequality?
b. Which country has the most income inequality?
c. Countries Y and Z are identical in all but one respect: population distribution. The share of the population made up of children below working age is much higher in country Z. Recently, however, birthrates have declined in country Z and risen in country Y. Assuming that the countries remain identical in all other respects, would you expect that in 20 years the Lorenz curves for the two countries will be closer together or farther apart? (Hint: According to the age-earnings cycle, what typically happens to income as an individual begins working and ages?)
a. X because for this country the Lorenz curve implies complete income equality.
b. Z because this country’s Lorenz curve is bowed farthest away from the case of complete income equality.
c. Closer, because if all other things including aggregate income remain unchanged, when more people in country Y are children below working age the share of income to people this age will decline, while the reverse will occur in country Z as more of its people reach working age and begin to earn incomes.
30-2. Consider the following estimates from the early 2010s of shares of income to each group. Use graph paper or a hand-drawn diagram to draw rough Lorenz curves for each country. Which has the most nearly equal distribution, based on your diagram?
Country Poorest 40% Next 30% Next 20% Richest 10%
Bolivia 13 21 26 40
Chile 13 20 26 41
Uruguay 22 26 26 26
Uruguay
30-3. Consider Figure 30-1 to answer the questions that follow.
a. What is the value of the Gini coefficient if area B is twice as large as area A?
b. Suppose that the Lorenz curve becomes more bowed, with the result that area B becomes exactly the same size as area A. What will be the new value of the Gini coefficient?
a. The Gini coefficient is equal to A/(A + B). If B = 2A, then this ratio becomes A/(A + 2A)
= A/(3A) = 1/3.
b. The Gini coefficient is equal to A/(A + B). If B = A following the change in the shape of the Lorenz curve, then this ratio becomes A/(A + A) = A/(2A) = 1/2.
30-4. Suppose that a nation has implemented a system for applying a tax rate of 2 percent to the incomes earned by the 10 percent of its residents with the highest incomes. All funds collected are then transferred directly to the 10 percent of the nation’s residents with the lowest incomes. What is the general effect on the shape of a Lorenz curve based on incomes after collection and redistribution of the tax?
less bowed
30-5. Estimates indicate that in recent years, the poorest 40 percent of the population earned about 15 percent of total income in Argentina. In Brazil, the poorest 40 percent earned about 10 percent of total income. The next-highest 30 percent of income earners in Argentina received roughly 25 percent of total income. In Brazil, the next-highest 30 percent of income earners received approximately 20 percent of total income. Can you determine, without drawing a diagram (though you can if you wish), which country’s Lorenz curve was bowed out farther to the right?
Brazil
30-6. Explain why the productivity standard for the distribution of income entails rewarding people based on their contribution to society’s total output. Why does the productivity standard typically fail to yield an equal distribution of income?
Following the productivity standard entails rewards based on each individual’s additional product—that is, the person’s marginal product—which by definition is the amount that the person adds to total output of goods and services. Because marginal productivity varies across individuals according to their skills and abilities, applying the productivity standard must yield an unequal distribution of income.
30-7. Identify whether each of the following proposed poverty measures is an absolute or relative measure of poverty, and discuss whether poverty could ever be eliminated if that measure were utilized.
a. An inflation-adjusted annual income of $25,000 for an urban family of four
b. Individuals with annual incomes among the lowest 15 percent
c. An inflation-adjusted annual income of $10,000 per person
a. Absolute. If economic growth ultimately led to inflation-adjusted annual incomes for all urban families of four rising above $25,000 per year, then by this definition poverty would be ended.
b. Relative. By this definition, the lowest 15 percent of income earners will always be classified as being in a state of poverty.
c. Absolute. If economic growth eventually raised inflation-adjusted annual incomes of all individuals above $10,000, then by this definition poverty would cease to exist.
30-8. Some economists have argued that if the government wishes to subsidize health care, it should instead provide predetermined amounts of payments (based on the type of health care problems experienced) directly to patients, who then would be free to choose their health care providers. Whether or not you agree, can you give an economic rationale for this approach to governmental health care funding?
Under this approach to government funding of health care, patients would have an incentive to search for low-price providers of the health-care services they desire. This would give health-care providers an incentive to operate more efficiently, thereby containing their costs.
30-9. Suppose that a government agency guarantees to pay all of an individual’s future health care expenses after the end of this year, so that the effective price of health care for the individual will be zero from that date onward. In what ways might this well-intended policy induce the individual to consume “excessive” health care services in future years?
First, a moral hazard problem will exist because government action would reduce the individual’s incentive to continue a healthful lifestyle, thereby increasing the likelihood of greater health problems that will require future treatment. Second, an individual who currently has health problems will have an incentive to substitute future care that will be available at a zero price for current care that the individual must purchase at a positive price. Finally, in future years the patient will no longer have an incentive to contain health care expenses, and health care providers will have no incentive to minimize their costs.
30-10. Suppose that a group of physicians establishes a joint practice in a remote area. This group provides the only health care available to people in the local community, and its objective is to maximize total economic profits for the group’s members. Draw a diagram illustrating how the price and quantity of health care will be determined in this community. (Hint: How does a single producer of any service determine its output and price?)
The joint practice will act as a monopoly and maximize economic profits by producing health-care services to the point at which marginal revenue equals marginal cost. It will then charge the price that patients in the area are willing to pay for health care and earn the maximum economic profits available in this market.
30-11. A government agency determines that the entire community discussed in Problem 30-10 qualifies for a special program in which the government will pay for a number of health care services that most residents previously had not consumed. Many residents immediately make appointments with the community physicians’ group. Given the information in Problem 30-12, what is the likely effect on the profit-maximizing price and the equilibrium quantity of health care services provided by the physicians’ group in this community?
The demand for health care will increase, and the marginal revenue curve will shift rightward. Hence, the profit-maximizing price and equilibrium quantity of health care services will increase.
30-12. A government agency notifies the physicians’ group in Problem 30-10 that to continue providing services in the community, the group must document its activities. The resulting paperwork expenses raise the cost of each unit of health care services that the group provides. What is the likely effect on the profit-maximizing price and the equilibrium quantity of health care services provided by the physicians’ group in this community?
The marginal and average total cost curves will shift upward, so the profit-maximizing quantity of health-care services will decline. The profit-maximizing price of health-care services will increase.
30-13. Suppose that in Figure 30-1 the area labeled A is one-fourth of the area denoted B. What is the value of the Gini coefficient?
The Gini coefficient is the ratio A/(A+B). Because A = (1/4)B, it must be true that B = 4A, so that A/(A+B) = A/(A+4A) = A/(5A) = 1/5 = 0.2.
30-14. Now suppose that in the situation described in Problem 30-13, the distribution of income changes in such a way that A increases to one-third of the area denoted B. What is the new value of the Gini coefficient?
The Gini coefficient is the ratio A/(A+B). Because A = (1/3)B, it must be true that B = 3A, so that A/(A+B) = A/(A+3A) = A/(4A) = 1/4 = 0.25. Because the Gini coefficient has increased, there is greater income inequality.
30-15. Based on your answers to Problems 30-13 and 30-14, when A increased, did the degree of income inequality increase or decrease? Explain why your answer makes sense by referring to the implied change in the shape of the Lorenz curve.
Because the Gini coefficient has increased, there is greater income inequality. This answer makes sense because an increase in A can take place only if the Lorenz curve becomes more bowed, which implies an increase in income inequality.
30-16. Takes a look at Figure 30-4. During the past decade, many members of the baby boom generation have passed through ages ranging from the middle 40s to the late 50s. Do you suppose that the fact that there have been more members of this generation than other generations in the population during this past decade tends to imply that there was higher or lower measured inequality over the period? Why?
Figure 30-4 indicates that most people earn their peak incomes between their middle 40s and late 50s. The fact that there are proportionately more members of the baby boom members among the population means that there have tended to be more higher-income people, other things being equal. The consequence would be greater measured inequality of incomes—again, other things being equal.
30-17. Consider Figure 30-5, in which the poverty rate has risen in some years and fallen in others but since 1985 has tended to lie in a range between 10 percent and just over 15 percent. If the government’s official poverty rate has been based on an absolute measure of poverty instead of a relative measure, would the data plot have tended generally to have sloped upward over time or to have sloped downward? Explain.
If the government’s official measure had been based on an absolute income threshold, as average income rose with economic growth, the number of people in poverty would have declined. Thus, the percentage of the population in poverty—that is, the poverty rate, also would have fallen over time. The result would have been a general downward slope for the data plot.
30-18. Take a look at both Figure 30-7 and Figure 30-8. When health care programs such as Medicare, Medicaid, and the Affordable Care Act’s health exchange system were created, Congress based projected costs on quantities of health care consumed at the time the programs were implemented. Was this a reasonable assumption given that the programs all cut out-of-pocket payments for beneficiaries? Explain.
No, this was not a reasonable assumption. The lower out-of-pocket payments over time shown in Figure 30-7 imply a lower price of health care services faced by consumers. As Figure 30-8 indicates, a reduced price of health care services generates a movement down along the demand curve for such services. People consequently consume more services rather than the same amount as before.
Selected References
Bethel, Tom, “The Transfer Society,” The Cato Journal, Vol. 6, No. 1, Spring/Summer 1986.
Bethel, Tom, “The Political Economy of Poverty,” The Cato Journal, Vol. 5, No. 1, Spring/Summer 1985.
Folland, Sherman, Allen Googman, and Miron Stano, The Economics of Health and Health Care,
New York: Macmillan, 1993.
Green, C., Negative Taxes and the Poverty Problem, Washington, D.C.: The Brookings Institute, 1967.
Leftwich, Robert H. et al., The Economics of Social Issues, 8th ed., Homewood, IL: Irwin, 1988.
Murray, Charles, Losing Ground: American Social Policy 1950–1980, New York: Basic Books, 1984.
Nash, Ronald H., Poverty and Wealth: The Christian Debate Over Capitalism, Westchester, IL: Crossway Books, 1986.
Osberg, Lars, Economic Inequality and Poverty, New York: M.E. Sharpe, 1991.
Schultz, T. W., “Investing in Poor People: An Economist’s View,” American Economic Review, May 1965, pp. 510–520.
