MBMC The Environment, Health, and Safety. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health,

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The Environment, Health, and SafetyThe Environment, Health, and Safety

Chapter 15: The Environment, Health, and Safety Slide 2

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Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.

Introduction

In response to the oil shocks of the 1970s, policymakers proposed a 50 cents/gallon tax on gasoline.

The gasoline tax would be rebated with a reduction in payroll taxes.


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Introduction

Proponents said the benefits of the tax would include:Less gasoline consumption.Less pollution.Less highway congestion.

Opponents argued that the quantity demanded of gasoline would not change.


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Introduction

What Do You Think?Was the opponents argument based on

sound economic logic?


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The Economics ofHealth Care Delivery

Healthcare Spending (% of National Income)1940 -- 4%2005 -- 14%

Reasons for the Increase in CostTechnologyThird-party payment system


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Applying the Cost-Benefit CriterionThe most efficient way to allocate

healthcare services is with the cost-benefit test.

A medical service should be performed only if the benefit exceeds the cost.


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Applying the Cost-Benefit CriterionThe third-party payment system has

virtually eliminated the cost-benefit test from the medical services market.


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ExampleHow long should David stay in the hospital?


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The Demand for Hospital Care

Length of hospital stay (days)

Pri

ce (

$/d

ay)

How long should David stay in the hospital?

D

1

300

3

• Price of hospital rooms = $300/day

• Assume David is paying for his room and MC = MB at 1 day.

• Assume insurance pays for his room and MC to David = 0

• He stays 3 days.


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ExampleHow much waste does full insurance

coverage cause?


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The Waste That Results from Full Insurance Coverage


Pri

ce (

$/d

ay)

D

1

300

3

S

Benefit from additional stay

Lost surplus from additional stay

• MC = $300/day• 3 day stay benefit =

$300 and cost = $600

• Loss in economic surplus = $300


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The Waste That Results from Full Insurance Coverage


Pri

ce (

$/d

ay)

D

1

300

3

S

Benefit from additional stay

Lost surplus from additional stay

• Assume the insurance company pays David $700.

• David would stay one night.

• The benefit of an extra day is less than the cost ($300).

• The $700 is $200 less than the $900 cost for 3 days.


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First-dollar Insurance CoverageInsurance that pays all expenses generated

by the insured activity

Health Maintenance Organization (HMO)A group of physicians that provides health

services to individuals and families for a fixed annual fee


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Designing a SolutionMeasuring price elasticity of demand for

health care (experiment on two groups)Group 1: Receives first-dollar coverage

(insurance that pays all expenses generated by insured activity)

Group 2: $1,000 deductible coverage


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health care (experiment on two groups)Findings

o Group 2 consumers purchased 40% - 50% less health care than Group 1

o No measurable differences in health outcomes


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health care (experiment on two groups)Policy Implications

o Adopt a system of high deductible health insuranceo Use stipend payments for the pooro An efficient policy will increase the size of the health

care pie


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Economic NaturalistWhy is a patient with a sore knee more

likely to receive an MRI exam if he has conventional health insurance than if he belongs to a health maintenance organization?


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Economic NaturalistIn the richest country on Earth, why do so

many people lack basic health insurance?


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Economic NaturalistThe Problem

The cost of health insurance ($5,000/yr for a family of four) exceeds the benefits and healthy families choose not to have health insurance.

As healthy families forgo health insurance, the cost of the insured pool will increase.


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Economic NaturalistA Possible Solution

A government reimbursement of $5,000 to each family

Cost would be $350 billion/yrHigher taxes offset by higher salaries and

reductions in high cost care for the uninsured


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Using Price Incentives in Environment Regulation

Goods producing negative externalities tend to be overproduced.To reduce pollution, we must choose how

to distribute pollution control among the producers.


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The most efficient--and hence best--distribution of effort is the one for which each polluter’s marginal cost of abatement is exactly the same.

Requiring all firms to reduce their pollution by an equal amount will be inefficient if the firms have different marginal costs of pollution abatement.


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ExampleWhat is the least costly way to cut pollution

by half?


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Costs and Emissions for Different Production Processes

Process(smoke)

A(4 tons/day)

C(2 tons/day)

B(3 tons/day)

Cost to Sludge Oil($/day)

D(1 ton/day)

E(0 tons/day)

100 200 600 1,300 2,300

Cost to NorthwestLumber ($/day)

300 320 380 480 700

Scenario I•No pollution regulation•No negotiation between producers & those harmed by pollution•Each firm will produce 4 tons/day of pollution

What is the least costly way to cut pollution by half?


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Process(smoke)

A(4 tons/day)

C(2 tons/day)

B(3 tons/day)

D(1 ton/day)

E(0 tons/day)

100 200 600 1,300 2,300

300 320 380 480 700

Scenario II•Require each firm to reduce pollution by half•Each firm will use process C

•Cost to Sludge Oil = $600 - $100 = $500/day•Cost to Northwest Lumber = $380 - $300 = $80/day•Total Cost = $580/day





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Process(smoke)

A(4 tons/day)

C(2 tons/day)

B(3 tons/day)

D(1 ton/day)

E(0 tons/day)

100 200 600 1,300 2,300

300 320 380 480 700

Scenario III•Impose a $40/ton tax on pollution

•Sludge produces A•Northwest produces B•Pollution = 7 tons/day





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Process(smoke)

A(4 tons/day)

C(2 tons/day)

B(3 tons/day)


D(1 ton/day)

E(0 tons/day)

100 200 600 1,300 2,300


300 320 380 480 700

Scenario IV•Impose a $101/tax on pollution

•Sludge produces B•Northwest produces D•Pollution = 2 tons/day

Scenario IV• Cost = $100 for Sludge & $180 for Northwest = $280 TC

• Cost is $300 less per day than requiring each to cut pollution by half



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Taxing PollutionThe advantage of the tax approach is that

it concentrates pollution reduction in the hands of the firms that can accomplish it at the least cost.

A caveat:It can be difficult to determine the optimal tax

rate.


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Auctioning Pollution PermitsSet a target level for pollutionAuction pollution permits to emit that level


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ExampleHow much will pollution permits sell for?


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Process(smoke)

A(4 tons/day)

C(2 tons/day)

B(3 tons/day)

Cost to Sludge Oil

($/day)

D(1 ton/day)

E(0 tons/day)

100 200 600 1,300 2,300

Cost to Northwest

Lumber ($/day)300 320 380 480 700

•Goal is to cut pollution by half to 4 tons/day•No smoke can be emitted without a permit•Government auctions 4 permits for 1 ton/day•Sludge bid: 1 @ $1,000, 2 @ $700, 3 @ $400, 4 @ $100•Northwest bid: 1 @ $220, 2 @ $100, 3 @ $60, 4 @ $20

How much will pollution permits sell for?


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Process(smoke)

A(4 tons/day)

C(2 tons/day)

B(3 tons/day)

Cost to Sludge Oil

($/day)

D(1 ton/day)

E(0 tons/day)

100 200 600 1,300 2,300

Cost to Northwest

Lumber ($/day)300 320 380 480 700

• Government set the opening bid at $90•Sludge will want 4 permits•Northwest will want 2 permits•Total permits is 6

• Government will raise the price until quantity demanded = 4 permits



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Process(smoke)

A(4 tons/day)

C(2 tons/day)

B(3 tons/day)

Cost to Sludge Oil

($/day)

D(1 ton/day)

E(0 tons/day)

100 200 600 1,300 2,300

Cost to Northwest

Lumber ($/day)300 320 380 480 700

• At $101•Sludge will buy 3 and use B•Northwest will buy 1 and use C



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Process(smoke)

A(4 tons/day)

C(2 tons/day)

B(3 tons/day)

Cost to Sludge Oil

($/day)

D(1 ton/day)

E(0 tons/day)

100 200 600 1,300 2,300

Cost to Northwest

Lumber ($/day)300 320 380 480 700

• Cost•Sludge = $100 (switching from A to B)•Northwest = $180 (switching from A to D)•Total cost = $280•Savings = $300



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Advantages of the Auction MethodUtilizes low cost pollution controlDoes not require firms to make costly

investments that they might have to abandon

It allows private citizens to influence the optimal level of pollution abatement


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Workplace Safety Regulation

What Do You Think?Is safety regulation needed to protect

workers from exploitation?


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ExampleWill Don and Michael choose the optimal

amount of safety?


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ExampleScenario

Don and Michael are the only members of a community.

They get satisfaction from: income, safety, and relative income.

They must choose between a: o Safe job @ $50/wko Risky job @ $80/wk


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ExampleWhich job will they take?

Viewed in isolation, they will choose the safe job.


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The Effect of Concern about Relative Income on Worker Choices Regarding Safety

$80 each$120 for Don

$50 for Michael

$50 for Don$120 for Michael

$90 each

Safe job @ $50/week Risky job @ $80/week

Safe job @ $50/week

Risky job @ $80/week

Don

Michael

When choosing independently:• The dominant strategy for each is the risky job.• Each experience an economic loss of $10.If they choose collectively, they will choose the safe job.They might support safety regulation.


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ObservationsWhen relative income is a priority, self-

interested actions will not always lead to efficient outcomes in the labor market.

OSHA-style prescriptive safety regulation may create inefficient results.


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An Alternative to OSHAWorkers Compensation

A government insurance system that provides benefits to workers who are injured on the job.


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Workers CompensationCreates a financial incentive for employers

to reduce work-place injuriesCurrently, the premiums are not adjusted

to each employer’s safety record


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Workers CompensationPremiums for employers with good safety

records exceed the claims filed by their employees, & vice versa.

If insurance premiums reflected the full social cost of the injuries of each employer’s workers, the optimal level of safety would be chosen, where MC = MB.


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Economic NaturalistWhy does the government require safety

seats for infants who travel in cars, but not for infants who travel in airplanes?


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Public Health and Security

Economic NaturalistWhy do many states have laws requiring

students to be vaccinated against childhood illnesses?


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Public Health and Security

Economic NaturalistWhy do more Secret Service agents guard

the president than the vice president, and why do no Secret Service agents guard college professors?


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Differential Investment in Crime Prevention

Number of agents protecting the president

$/ag

ent

MC

NP

MBP


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Number of agents protecting the vice president

$/ag

ent

MC

NVP

MBVP



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Number of agents protecting an English professor

$/ag

ent

MC

NVP

MBE


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Chapter

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MBMC The Environment, Health, and Safety. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15: The Environment, Health,