Health Policy in Economic Perspectives: Market Failure 24 SEP 2009 서울대학교의과대학 의료관리학교실 김영치 Young Chi Kim, MD, PhD, MPH
Perfect Competition Many Buyers and Sellers A Standardized (Identical) Product Mobile Resources Perfect Information
Equilibrium Price P 1 Surplus S P 0 P 2 0 Shortage Q 0 D Quantity
EFFICIENCY UNDER PERFECT COMPETITION Defining social efficiency Pareto improvements Pareto optimality Private efficiency rational economic behaviour equating marginal benefits and marginal costs
Perfect Competition P S P MC AC P 0 P 0 D = MR D Q 0 Q q 0 Q Market Representative Firm
The Theory of Firm Behavior All firms sell an identical product. All firms are price-takers. All firms have a relatively small share. The industry is characterized by freedom of entry and exit.
Welfare Implications: Maximum Total Surplus Consumer Surplus: Willingness to pay Producer Surplus: Willingness to provide
P Maximum total surplus under perfect competition S = MC A P e B C D = MU O Q e Q
MARKET FAILURE In any given market, the quantity of a product demanded by consumers does not equate to the quantity supplied by suppliers. A market is not efficiently allocating goods and services. The social costs of producing the goods and services are not minimized, resulting in a waste of some resources. Market forces do not serve the perceived public interest.
Market Failure Market Power Externalities Public Goods Information Imbalance Inequality
Market Power Monopoly Oligopoly Monopsony Collusion Price Fixing Rigging of Markets Barriers to Entry
Imperfect Competition Supply-Side Imperfection: Monopoly Demand-Side Imperfection: Monopsony
The Monopolist s Demand Curve
Monopolist Profit Maximization Q: How Do Monopolists Maximize Profits? A: By Producing Where MR = MC
Revenue and Cost for a Monopolist Producing Widgets
Social Cost of Monopoly
Natural Monopoly Definition: One firm can produce a desired output at a lower social cost than two or more firms-that is, there are economies of scale in social costs. railways, telecommunications, water services, electricity, and mail delivery A natural monopoly and a monopoly are not the same concept. A natural monopoly describes a firm's cost structure (high fixed cost, extremely low constant marginal cost). A monopoly describes market share and market power; the two are not synonymous.
Monopsony
Monopsony Price P 0 MC S (Opportunity cost) D Quantity Q 0 Q D
Social Cost of Monopsony
Oligopoly: Collusion Uniform prices A penalty for price discounts Advance notice of price changes Information exchanges Swaps and exchanges
Externalities
External Costs and Benefits External or social costs The cost of an economic decision to a third party External benefits The benefits to a third party as a result of a decision by another party
External Costs External Costs Decision makers do not take into account the cost imposed on society and others as a result of their decision e.g. pollution, traffic congestion, environmental degradation, depletion of the ozone layer, misuse of alcohol, tobacco, anti-social behaviour, drug abuse, poor housing
External Benefits External benefits by products of production and decision making that raise the welfare of a third party e.g. education and training, public transport, health education and preventative medicine, refuse collection, investment in housing maintenance, law and order
Positive and Negative Externalities Costs and benefits in production: External costs in production where MSC = MSB MPC e.g. air and water pollution, congestion, housing development on green belt areas, destruction of hedgerows and wildlife, noise, pollution, anti-social behaviour, crime External benefits in production where MSC < MPC e.g. human resource development, research and development in industry
Externalities Cost per Commuter Mile MSC m Marginal Social Cost Marginal Private Cost P * P m Q * Q m Marginal Benefit The External Costs of a Daily Commute Commuter Miles
Costs and benefits ( ) Costs and benefits ( ) External costs and benefits in consumption External benefit External cost P P P P MSB MB MB MSB O Q 2 Q 1 Car miles O Q 1 Rail miles Q 2 (a ) External costs (b) External benefits
Costs and benefits ( ) Costs and benefits ( ) External costs and benefits in production MSC MC = S MC = S MSC External benefit P External cost D P D O Q 2 Quantity Q 1 O Q1 Quantity Q2 (a ) External costs (b) External benefits
Positive and Negative Externalities Measuring positive and negative externalities: Consumer surplus Producer surplus Willingness to pay Net Present Values Risk values probability of an event x monetary value Cost-Benefit Analysis
Public Goods Definition: goods or services that can be consumed by several individuals simultaneously without diminishing the value of consumption to any one of the individuals Non-rivalry Non-excludability
Optimal Output: Private versus Public Goods Price Price Supply Supply P 1 P 0 D P 2 D D 2 D D 2 1 D 1 0 0 Q 0 Q 1 Q * Quantity Q * Quantity P 3 Private Good Public Good
Free Rider Price Supply D s D Quantity
The Free Rider Problem Ronald Coase, The Lighthouse in Economics 1974
Merit Goods Inadequate Provision Merit Goods Could be provided by the market but consumers may not be able to afford or feel the need to purchase market would not provide them in the quantities society needs Education nurseries, schools, colleges, universities could all be provided by the market but would everyone be able to afford them?
De-Merit Goods Goods which society over-produces Goods and services provided by the market which are not in our best interests! Tobacco and alcohol Drugs Gambling
Information Asymmetry Kenneth Arrow, Uncertainty and the Welfare Economics of Medical Care, 1963 Adverse selection Moral hazard George Akerlof, The Market for Lemons, 1970
Adverse Selection George Akerlof s The Market for Lemons The average value of the commodity tends to go down. Michael Spence s Signaling Joseph E. Stiglitz s Screening
Inequality Inequality: Poverty absolute and relative Distribution of factor ownership Distribution of income Wealth distribution Discrimination Housing
Measures to Correct Market Failure Measures to correct market failure State provision Extension of property rights Taxation Subsidies Regulation Prohibition Positive discrimination Redistribution of income
Market Failure Neoliberalism: Market-oriented solutions to market failure Internalizing the external cost, e.g., the pollution permit Government creates an artificial market for pollution rights