MHSA 8635 Health Policy Seminar Governmental Intervention in Private Markets

Transcription

1 MHSA 8635 Health Policy Seminar Governmental Intervention in Private Markets ** Two predominant theories of governmental activity in otherwise private markets have been proposed by political scientists (and adopted by economists) for purposes of explaining the rationale for governmental intervention(s) into private markets: (1) the public interest theory; (2) the special interest (economic) theory of government. (1) Public Interest Theory: predicts that governments intervene into otherwise private markets for the sole purpose of better serving the public interest by improving the efficiency of markets and/or achieving a certain type/level of social equity. ** From the discussion of market structure, it was said that competitive markets were preferred by most economists because of their ability to achieve allocative efficiency; that is, production of the right types and quantities of goods/services that consumers want (based on the marginal benefit they derive from those goods and services) at the lowest opportunity cost to society (marginal cost of production). Empirically, allocative efficiency in the marketplace is said to be achieved once the marginal benefit of consumption is equal to the marginal cost of production. ** As good as competitive markets are at achieving allocative efficiency, they do not always result in such an outcome due to the presence of one or more market imperfections in such markets. Examples of common market imperfections that can result in a loss of allocative efficiency include imperfect competition in the marketplace (monopoly elements, non-profits), the lack of perfect consumer information, the presence of socially significant market externalities. ** Additionally, it should be noted that, as good as competitive markets are in terms of achieving allocative efficiency, they do not necessarily result, in many cases, in a socially desirable distribution of wealth/income across all market participants. Such a result, based on some value judgement as to what the appropriate distribution of wealth/income should be, would be regarded as inequitable. Historically, free (competitive) markets have not done nearly as well on this criterion as they have in terms of efficiency.

2 ** According to this theory of government, the appropriate role of the government in such circumstances is to intervene in such imperfect markets vis-à-vis the enactment of social legislation in order to improve market (allocative) efficiency and/or to redistribute wealth/income so as to result in a more equitable outcome. ** Common examples of social legislation/regulation that are enacted for these purposes include public policies to promote market competition (antitrust laws), provide consumer information, correct for socially significant externalities (taxation/subsidization policies), and redistribute wealth/income more equitably (welfare/social security, Medicare, Medicaid). (2) Special Interest (Economic) Theory: predicts that governments intervene into otherwise private markets for the sole purpose of serving one or more special interest groups vis-à-vis the enactment of social legislation to benefit special interests at the collective expense of the public interest. ** The economic theory of government postulates that governmental policymaking occurs within a legislative marketplace, where demanders of social legislation (special interest groups) and suppliers of social legislation (politicians) interact, producing the desired amount of special-interest legislation at some market clearing (equilibrium) price (votes, campaign contributions, etc.) ** Special interest groups, in this model of government behavior, are presumed to have significant power in the marketplace for social legislation (market power in terms of demand), whereas individual consumers/voters, who collectively comprise the public interest, are assumed to have no market power at the individual level, thus having no ability to affect (on their own) the level of output produced (legislation). ** The net result of such a disparity in market power on the demand side of the marketplace for social legislation is that special interests are able to obtain market results (in the form of legislation) that are favorable to them, while the public interest pays for the net cost of that legislation. (i.e. transfer of wealth from public interest to special interest). ** It is likely the case that both theories of government are valid representations of governmental behavior in certain legislative circumstances, with some forms of social legislation more clearly benefiting the public interest and other forms of legislation more clearly benefiting a special interest.

3 ** Typology of Governmental Intervention ** Based on some underlying theoretical justification for governmental involvement in the private marketplace, what follows are the most common forms of governmental intervention vis-à-vis the enactment of social legislation that are utilized for these purposes. ** Provision of Public Goods: a public good is defined by economists as a type of good that exhibits non-rival consumption whose benefits are non-exclusive to those who are willing/able to pay. ** A good that exhibits non-rival consumption can be simultaneously consumed by more than one consumer without diminishing the quantity available to other consumers. ** A good whose consumption benefits are non-exclusive to those who are willing/able to pay for the good does not allow for the (feasible) exclusion of free riders (those not willing/able to pay) from obtaining any such benefits. ** Classical examples of public goods include national defense, public education, and some forms of biomedical research. Such goods exhibit both non-rival consumption and non-exclusive benefits as required for public goods. ** The economic dilemma associated with public goods is that, because such goods exhibit both non-rival consumption and non-exclusive benefits, there are few/no direct incentives for private market producers to produce such goods, as they will be unable to exclude non-payors from consuming/benefiting the goods they produce. Because consumers are rational beings and would prefer to pay less/nothing for a given benefit, the potential for free riders with public-type goods is enormous. ** The economic solution to such dilemmas is for government to directly produce/provide such public goods and to subsequently enforce payment for the benefits those goods provide through compulsory taxation. ( everybody benefits, everybody pays ) ** In the absence of governmental provision as an economic solution to public goods, such goods would be vastly under-produced in the private marketplace.

4 ** Correct for Socially Significant Market Externalities: externalities are defined as unpriced byproducts of production or consumption that adversely or beneficially affect one or more third parties not directly involved in a given market transaction. They have also been referred to as spillover effects in the economics literature. ** In a normally functioning competitive marketplace, the vast majority of market transactions occur between buyers and sellers, who consummate innumerable mutually beneficial market exchanges (i.e. both parties are better off post-exchange) and completely internalize the costs and benefits associated with the transactions. (e.g. going to the dentist) Such exchanges are all efficient, resulting overall in market allocative efficiency. ** The economic dilemma raised by the presence of one or more socially significant market externalities in a private marketplace is that such spillover effects reduce the allocative efficiency of markets and/or result in one or more inequitable distributions of wealth/income. Based on the public interest theory of government as described, such a scenario warrants governmental involvement. ** Socially-significant externalities most often exist secondary to the lack of definable and enforceable property rights in non-market arrangements. In many types of situations, persons don t directly own certain types of things (e.g. rivers, education) and thus are not able to be charged or reimbursed via a functioning price system in instances where they incur costs for which they receive no benefits and/or receive benefits for which they paid nothing. ** Theoretically, governments can serve as a legitimate agent of society s collective wishes to address socially significant externalities to increase market efficiency where: (1) the size of the externality is potentially large (i.e. large # s of persons potentially affected); (2) the size of the externality can be quantitatively estimated. Governments can execute this role by (1) estimating the size/type of externality involved; (2) deciding the appropriate policy approach to finance the externality. (more below) ** Examples of different types of externalities are listed below. Marketplace externalities can occur on either/both the supply side and/or the demand side as follows:

5 ** Demand-side externalities: consumption-related activities that result in either beneficial effect(s) on some third party (positive demand side externality) or detrimental effect(s) on some third party (negative demand side externality). ** Examples: (1) vaccinations as a form of consumption activity resulting in a positive demand side externality (external benefit); (2) cigarette smoking as a consumption activity resulting in a negative demand side externality (external cost). ** Supply Side Externalities: production-related activities that result in either beneficial effect(s) on some third party (positive supply side externality) or detrimental effect(s) on some third party (negative supply side externality). ** Examples: (1) biomedical research as a form of production-related activity resulting in a positive supply side externality (external benefit); (2) air pollution a production-related activity resulting in a negative demand side externality (external cost). ** The appropriate governmental response where there are quantifiable, socially significant externalities in private markets is to enact various types of social legislation to effectively "internalize" the various external costs/benefits in those markets, resulting in a more efficient market outcome (more/less consumption, more/less production). ** From a public policy standpoint, the most commonly employed mechanisms for addressing socially significant market externalities is through the provision of market incentives, namely through the use of taxation and subsidization. ** Taxation, as a general rule, provides an incentive for consumers/producers to reduce their level of consumption/ production. Subsidization, meanwhile, provides incentives for consumers/producers to increase their level of consumption/ production. In economic shorthand, if you want to reduce the incidence of some activity, tax it. If you want to increase the incidence of some activity, subsidize it.

6 ** The overarching social goal of such types of policies is to more closely align private incentives to produce and/or consume with social objectives related to that consumption and/or production. As such, these types of policies tend to be used quite often to address socially significant market externalities, as discussed previously. (e.g. pollution taxes, biomedical research subsidies) ** Regulate the Imperfect Market ** Governmental regulations are intended to constrain the behavior(s) of one or more market participants or entire industries in some cases, while attempting to preserve the market framework and private market transactions. ** From an economic perspective, regulations are intended to address efficiency and/or equity problems that are associated with imperfect (non-competitive) markets. Examples include the regulation of monopolies and non-profits. ** The classical case of the use of public regulation is in the case of the natural monopoly. Natural monopolies are considered a form of market failure by economists because such markets are allocatively inefficient (i.e. produce less than a socially desirable level of output at a higher price than would otherwise be present in a more competitive market structure). Such markets are thus classically welfare reducing. ** The presumed goal of public regulation of natural monopolies, at least according to public interest theory, is to reduce welfare losses to the public, thereby increasing social welfare (and improving allocative efficiency. ** The most common form of regulation for addressing such scenarios is rate of return regulation, which is related to rate/reimbursement regulation. Typically, public regulations are enacted to address natural monopoly situations to "cap" or limit the rates, or market price, that natural monopolies can charge for their output. ** Other common forms of regulation for dealing with natural monopolies include the enforcement of antitrust regulations, much as has been seen in the recent case against Microsoft.

7 ** Other forms of regulation, such as social and quality regulations, are presumably enacted for the purpose of protecting the public from unscrupulous or unethical producers of some output. ** Redistribute Wealth/Income: as discussed before, competitive markets cannot guarantee a socially desirable level of equity will result from competitive market activities. It turns out that inequities in the distribution of capital in competitive markets will necessarily result in an inequitable distribution of wealth in a perfectly competitive marketplace with no altruism. ** Under the presumption that redistributing wealth/income from the rich to the non-rich provides a benefit to all (external benefit) whether they contribute or not, there is an economic justification for redistributive policies involving progressive forms of taxation and the provision of various types of subsidies to the non-rich. ** The economic justification for such policies is predicated on the presence of both vertical equity (unequals treated unequally) and horizontal equity (equals treated equally) in any redistribution program. These equity issues have important implications with regard to the design of such tax/subsidy based programs.