Transcript
Chapter 19 – Government Intervention in Health Care Markets
Key Ideas
To this point, the book has spoken in passing about government regulations, and licensure, but Chapters 19 and 20 look at the development of policies.
Economists view monopoly as undesirable, not because of the political power of big corporations, but because monopolists, in maximizing profits, do not produce where marginal cost equals price. Instead, they produce where marginal cost equals marginal revenue, and this results in less of the good being produced than other competitive markets.
The undesirable nature of monopoly has to do with quantities, although the higher prices lead to a transfer of resources to monopolists. One might note the somewhat counterintuitive result that with perfect price discrimination (appropriating all of the consumers’ surplus), the “right” amount is produced.
Economists often propose taxes or subsidies to address externality problems.
Economists often propose competitive strategies to address monopoly problems.
Teaching Tips
It is worth emphasizing the idea of welfare loss due to monopoly. The shaded area in Figure 19-1 occurs because there are some buyers who are willing to pay more (the demand curve) than it would cost society to produce the good.
An example of a welfare loss occurs in Figure 19-3 for positive externalities. Here the market does not provide complete signals.
Talk about industries that are obviously competitive such as computer games and computer hardware. What has the result been? Is the health care industry similar? Why or why not?
The “Chicago model” of regulation, where industries try to “capture” the regulator, is very different from the traditional model. Students may find it particularly applicable to health care, insurance, or to tax policies.
Chapter 19 – Government Intervention in Health Care Markets – Multiple Choice
When a seller has some monopoly power, it means that:
the seller will lose all of its customers if it raises its price.
in the long run the seller will have zero profits.
the seller could raise price without losing all of its customers.*
the seller is the only provider of the service
In the figure above, the monopolist will produce quantity _______ and sell it at price ______.
Q1; P2.
Q1; P1.*
Q2; P2.
Q3; P3.
The “welfare” loss due to monopoly can be calculated as:
P2 x (Q2 – Q1)
(P1 – P2) x (Q2 – Q1)
(P1 – P2) x (Q2 – Q1)/2*
(P1 – P2) x Q1.
In the figure above, if a monopolist could determine exactly how much each consumer would be willing to pay, and charge him or her appropriately, the equilibrium output would be:
Q1, which is leads to a societal welfare loss.
Q2, which leads to a societal welfare loss..
Q2, which does not lead to a societal welfare loss.*
Q3, which does not lead to a societal welfare loss.
In the figure above, if the monopolist can determine and charge the price that each consumer is willing to pay, equilibrium quantity produced will be _____ and deadweight loss will be ____:
Q2; 0.*
Q2; the area between the demand curve and P2 between quantities 0 and Q2.
Q3; 0.
Q1; the area between the demand curve and P2 between quantities Q1 and Q2
In the figure above, the regulator forces the monopolist to charge price P3:
market quantity will decrease and price will increase.
market quantity will increase, and deadweight loss will decrease.
market price will decrease.
Answers (b) and (c) are correct.*
*** The following questions refer to the figure directly below
In the figure above, the optimal amount of the public good is:
Q1*
Q2
Q3
We are unable to tell from this figure.
In the figure above, if the government provides level Q2 of the public good:
it leads to a welfare gain because it creates jobs in the public sector.
it is the optimal level.
it is less than the optimal level Q3.
it leads to a welfare loss because the MC is less than the sum of the marginal benefits.*
In the figure above, the optimal price for Person B is:
P1
P2*
P3
P4.
In the figure above, person A’s twin, with an identical demand curve to A, wishes some of the public good, the optimal amount:
is the same because the twin is identical.
decreases because they can share the good.
increases because the sum of the marginal rates of substitution increases.*
We can not tell from this diagram.
The Hill-Burton Act:
was a New Deal act providing health insurance to the poor.
provided for state matching funds to establish health clinics.
provided federal support for the construction of new hospitals.*
Answers (a) and (b) are correct.
Regulation of the insurance industry occurs primarily at the ___ level.
state*
county
federal
municipal
*** The following questions refer to the figure directly below
Suppose that a firm that is refining raw materials also pollutes the water, a public health concern. The marginal costs of the raw materials are MPC, but the pollution cost is MEC (marginal external cost). The total social cost MSC = MEC + MPC. The market equilibrium (assuming that the pollution is not taken into account) is at point ___; the optimal quantity is at point _____.
A; C.
B; C.
C; B.*
D; E.
In the figure above, if the government wishes to achieve an optimum it should impose a tax of ___ per unit:
$A.
$(E – A).*
$0.
$(F – A).
In the figure above, the optimal amount of pollution occurs at:
zero output.
QB.*
QC.
QD.
The optimal amount of a health care program occurs where:
Total costs = total benefits.
Marginal costs = total benefits.
Marginal costs = marginal benefits.*
Marginal benefits = 0.
Total benefits are maximized where:
Total costs = total benefits.
Marginal costs = total benefits.
Marginal costs = marginal benefits.
Marginal benefits = 0. *
Food and Drug Administration regulations lengthen the time to approval and increase the cost of drug development. This suggests that we should:
ease the regulations and reduce drug costs.
evaluate whether the marginal costs from the current regulations are too costly for the marginal benefits provided.*
continue the current regulations to promote safety.
Answers (a) and (b) are correct.
An economic rationale for imposing a “junk food” tax would be that:
junk food causes obesity which imposes external costs on other people.
junk food causes obesity which is harmful to the consumers themselves.*
a junk food tax is a good way to raise large amounts of revenue.
the producers would bear the burden of the tax.
*** The following questions refer to the figure directly below
In response to price and quantity of health services at point D, the government regulators urge the use of managed care on the premise that they it may reduce expenditures by reducing demand for services, and reducing the costs per unit of services. If this policy is successful, one might expect:
lower equilibrium price, and lower equilibrium quantity.
lower equilibrium price, but the equilibrium quantity may be higher or lower.*
lower equilibrium quantity, but the equilibrium price may be higher or lower.
both the equilibrium quantity and the equilibrium price may be higher or lower.
Starting at point D, if regulators are successful in reducing the cost of care, without affecting demand, price will ____________.
not change.
fall from P1 to P2.*
fall from P1 to P3.
fall from P1 to P4.
Starting at Point A, if regulators impose cost controls on providers, but the providers are successful in inducing demand, the new equilibrium quantity is at point:
A.
B.
C.*
D.
Table 19-1 shows that in 2009 approximately ____ percent of national health expenditures were privately provided and approximately ______ were publicly provided.
12; 88.
27; 73.
42; 58.
56; 44.*
Table 19-1 show that approximately ____ percent of public health expenditures were federally provided and with the remaining ______ percent provided at the state or local level.
63; 37.*
57; 43.
47; 53.
35; 65.
*** The following questions refer to the figure directly below
In the figure above, in the Chicago model of regulation, the regulator’s total revenues are maximized where:
at point D, where the marginal revenue = 0.*
at point B, where marginal benefits = marginal costs.
at point A, where the marginal benefits are maximized.
at point C, the median between points B and D.
In the figure above, the Chicago regulator’s optimum occurs where:
at point D, where the marginal revenue = 0.
at point B, where marginal benefits = marginal costs.*
at point A, where the marginal benefits are maximized.
at point C, the median between points B and D.
In the figure above, if the Chicago regulator’s marginal costs rise, the optimal tax rate will:
rise, because it is more expensive to regulate.
rise, to increase the revenues.
fall, because it is more expensive to regulate.*
fall, because the regulator will need less money.
*** The following questions refer to the figure directly below
In the diagram above, if triangle A equals triangle B, and bureaucrats provide a program at level Q3, then they have:
chosen a level at which total benefits equal total costs.
chosen a level at which marginal benefits equal marginal costs.
provided an inefficiently large amount of the output.
Answers (a) and (c) are correct.*
In the diagram above, if triangle A equals triangle B, and bureaucrats provide a program at level Q1, then they have:
chosen a level that is economically desirable because marginal benefits exceed marginal costs.*
chosen a level at which marginal benefits equal marginal costs.
provided an inefficiently large amount of the output.
answers (a) and (c) are correct.
In the diagram above, if triangle A is smaller than B, and bureaucrats provide a program at level Q1, then they have:
chosen a level at which total benefits equal total costs.
chosen a level at which marginal benefits equal marginal costs.
provided an inefficiently large amount of the output.
None of the answers above are correct.*
