Context: Market for Vaccines

Transcription

1 9.29

2 Positive consumption externalities occur when the consumption of a good positively affects the well-being of third parties who do not pay any compensation for that effect. E.g Neighbour s garden Context: Market for Vaccines 9.29

3 Guiding questions: State and define the source of market failure in this context. What s the PMC in this context? What s the PMB in this context? What s the EMB or EMC in this context? Explain the divergence between SMC and PMC or between SMB and PMB. Did the free market under/over-priced in the context? Where s Qm and Qs? Compare to determine if there s misallocation of resources. What is the impact on society s welfare? Now, pls attempt the answer the above question

4 Positive Consumption Externality Market for vaccines: Private marginal benefits (PMB) (e.g. improved immunity against certain diseases) + External marginal benefits (EMB) (e.g. 3 rd parties have lower risk of contracting the illness and hence lower healthcare cost incurred; healthier and more productive workforce which benefits employers in terms of higher output and hence revenue) = Social marginal benefits (SMB) (e.g. total benefits to society)

5 Positive Consumption Externality Market for vaccines: Private marginal costs (PMC) (e.g. cost to producers such as cost of raw materials and wages to workers) = Social marginal costs (SMC) (e.g. total costs to society) As External marginal costs (EMC) is negligible

6 Price EMB at Qm Market for Vaccines Qm Qs Assume EMC=0 PMC = SMC SMB = PMB + EMB PMB Quantity Market equilibrium quantity: PMB=PMC Qm EMB causes a divergence between PMB and SMB The true benefit of consuming vaccines has NOT been priced in, i.e. market has overpriced the consumption Socially efficient quantity: SMB=SMC Qs Underconsumption of Qs-Qm Free market underallocates resources to the consumption of vaccines inefficient allocation of resources market failure

7 Price Market for Vaccines EMB at Qm C Assume EMC=0 PMC = SMC B Underconsumption of Qm-Qs: Total Social Benefit = area QmQsBC A Qm Qs SMB = PMB + EMB PMB Quantity Total Social Cost = area QmQsBA Welfare loss = ABC Welfare loss due to +ve externality because of underconsumption

8 9.31

9 9.31 (A) Market based solution : Subsidies (B) Direct provision by government

10 (A)Subsidies to Producers 9.31 Price Market equilibrium, PMB=PMC Socially optimum equilibrium, SMB=SMC PMC = SMC (EMC = 0) Ps C B PMC - subsidy Pm Pm New market equilibrium, PMB=PMC-subsidy A D Subsidy = EMB at Qs PMB SMB = PMB + EMB Qm Qs Quantity of vaccines

11 9.31 (A)Subsidies to Producers Subsidy = EMB at Q S (distance BD) shifts the PMC vertically downwards by amount of subsidy new PMC, equals (PMC subsidy), coincides with the PMB at Q S.

12 9.31 (A)Subsidies to Producers new market equilibrium quantity where PMB = PMC subsidy coincides with the socially efficient quantity Q S, where SMB = SMC No more misallocation of resources

13 9.31 (A)Subsidies to Producers If the subsidy accurately reflects the external marginal benefit vaccine consumers are compensated for the external benefit to 3 rd parties (price they are paying after subsidy is lower at Pm,) The externality has then been internalised or priced in.

14 Subsidies: Advantages internalise the positive externality a market based approach gives the freedom of choice in making rational decisions with regard to the best level of consumption maximise society s welfare Can be adjusted to respond to the magnitude of the problem

15 Subsidies: Limitations Lack of Information: Government fail to measure external benefits ACCURATELY result in over-subsidizing or undersubsidizing Opportunity costs due to budget constraints Government needs to prioritize and decide what to spend on Strain on the government budget (unintended consequence) If government revenue < government spending. Need to raise revenue via higher taxes. Breeds inefficiency (unintended consequence) Less incentive for healthcare producers to use the lowest cost of production

16 9.32 (B) Direct Provision by Government Supplement provision by free market Schools Hospitals

17 9.32 (B) Direct Provision by Government Owned by the government, But run as private companies (not for profits) Singapore public hospitals, specialist centers, community hospitals

18 9.32 (B) Direct Provision by Government Building and operation costs are financed from tax revenues Goods & Services are subsidised such that there is co-payment E.g. Hospitalisation bills are subsidised

19 9.32 (B) Direct Provision by Government Some services could be provided free (i.e. fully subsidised) E.g. free vaccination against diseases such tuberculosis

20 9.32 Direct Provision by Govt: Limitations No Competition No Profit Motive Inefficiency

21 9.32 Direct Provision by Govt: Limitations UK residents are not charged for most medical treatment, with exceptions such as a fixed charge for prescriptions Financed by tax payers Income marginal tax rate as high as 45% Getting more inefficient

22 9.33 Imperfect Information Note: Assume no externalities

23 Non-provision of public goods Government intervenes when there are Market Failure Inequity (complete market failure) Presence of externalities (partial market failure) Information Failure (partial market failure) Merit & Demerit goods (partial market failure)

24 9.33 Market eqm is where PMC = PMB With imperfect information Perceived PMC is Actual PMC OR Perceived PMB Actual PMB

25 P 9.27 Incorrect Information Ignorance misinformed or received the wrong information from sellers. ignorant of the benefits or cost Generally caused by persuasive advertising low frequency of consumption or lack of experience/ information is too complex

26 Incorrect Information Persuasive advertising 9.33 Consumers are persuaded to believe the (incorrect) information by producers, and end up consuming more. REALLY??? Perceived PMC < Actual PMC

27 Incorrect Information Misinformed Consumers are persuaded to believe the (incorrect) information by producers, and end up consuming more. P 9.27 Example: Product labels 2. Car emissions: Volkswagen installed a defeat device which could detect when the car was being tested The device would change the performance of the car (engine runs below normal power) when it was being tested On the road, engines switch from test mode and emission levels are up to 40 times what the US allows! Volkswagen recalled 8.5 million cars in Europe and 500,000 in the US Perceived PMC < Actual PMC

28 9.33 Ignorance TV personality Andrea DeCruz was a victim Slim 10 Weight Control Pill-, did not inform consumers of the existence of controlled substances Ignorance results from producers hiding the information from the consumers. Hence the latter end up over consuming. Perceived PMC < Actual PMC + potential severe sideeffects such as kidney failure consumers overestimate their true private marginal benefit from consuming Slim 10 pills.

29 Ignorance 9.33 The information is right there. But as consumers don t do their homework, they don t know the full benefits of the goods/services and hence end up under consuming. Perceived PMB < Actual PMB Breast Cancer: early detection & action by Angelina Jolie Unaware of benefits (87% chance of cancer if she didn t do so) Increase probability of survival

30 Ignorance P 9.28 Lack of Awareness Due to lack of experience depends on how often the product is consumed Perceived PMB < Actual PMB Versus For e.g. did you know that washing machines that load from the front, rather than from the top, are more efficient and clean their loads better?

31 1. Is it a difference in cost or benefit? 2. Is the perceived PMC/PMB higher OR lower than actual PMC/PMB 3. JUSTIFY with reason 4. Draw the diagram 5. Determine Qm and Qm (both are market equilibrium) 6. Over/underconsumption? 7. Where is the deadweight loss? Note: the Y Axis is Cost/Benefit!

32 Is it a difference in cost or benefit? 2. Is the perceived PMC/PMB higher OR lower than actual PMC/PMB 3. JUSTIFY with reason 4. Draw the diagram 5. Determine Qm and Qm (both are market equilibrium) 6. Over/underconsumpt ion? 7. Where is the deadweight loss? Consumers have Imperfect Info about PMB Not aware of true benefits to self Probability of contracting colon cancer Benefits of early detection possibility of a complete cure! Perceived PMB < Actual PMB

33 E.g. Colorectal Cancer Screening 9.34 Cost/Benefit C PMC Consumption at Q m : PMB perceived = PMC Divergence: Perceived benefits lower than actual benefits A B Consumption should be at Q S : PMB actual = PMC Underconsumption of Cancer screening: Q m - Q m Deadweight loss: Area ABC PMB actual (perfect info) Q m Q m PMB perceived (imperfect info) Quantity Figure 9: Imperfect information on actual PMB of cancer screening

34 9.34 Besides lung cancer, Smoking damages your heart and your blood circulation, increasing your risk of developing conditions such as: coronary heart disease. heart attack. stroke. peripheral vascular disease (damaged blood vessels) cerebrovascular disease (damaged arteries that supply blood to your brain)

35 9.34 The Case of Smoking Cost/Benefit PMC actual (perfect info) B PMC perceived (imperfect info) A C PMB Qm Qm Quantity Market failure due to OVER CONSUMPTION

36 To correct PMBperceived to PMBactual A. Regulation B. Education & Moral Suasion 9.35

37 9.35 Health Warning Mandatory / Compulsory labeling, warnings Introduced in 2012 Entitles consumers in Singapore to reject goods with unsatisfactory quality upon delivery and get a full refund Within a reasonable period of time Loopholes? Lemon Law Act Nutritional Guide

38 9.35 UK: Ban on junk food advertisements Promoting unhealthy food to children on Twitter or Facebook will be banned under new UK advertising rules that will extend restrictions from television to social media, cinema and print. Singapore: Ban sale of cigarettes to those under 21 years old Loopholes?

39 To correct PMB perceived to PMB actual A. Regulation B. Education & Moral Suasion P 9.30

40 9.35 Education Provide Information Help in making Informed Decisions/ Choices PMB Perceived = PMB Actual OR PMC Perceived = PMB Actual Moral Suasion: Ways in which the government tries to persuade a change in consumer behaviour (eg. comply with a policy) without forcing them to do so.

41 9.35

42 Limitations of Education 9.35 & Moral Suasion Involves changing mind sets Education is a long drawn process

43 Limitations of Education 9.35 & Moral Suasion smoking campaigns need to start early in schools addictive product like cigarette

44 Non-provision of public goods Government intervenes when there are Market Failure Inequity (complete market failure) Presence of externalities (partial market failure) Information Failure (partial market failure) Merit & Demerit goods (partial market failure)