Class 5: Maximizing society’s sense of well
beingEconomic theory models social behavior that
achieves Pareto OptimumThe key question:
Is the social construct we call ‘Free Market Competition’ the best approach for achieving
Pareto Optimum in the Medical Care Industry?
Kenneth Arrow Nobel Prize Recipient in Economics - 1972
• Arrow’s 1963 article “Uncertainty and the Welfare Economics of Medical Care” created the field of health economics.
• Three concepts presented in this article:– The nonmarketability of bearing suitable
risks and imperfect marketability of information.
– Survey of special characteristics of the medical care market.
– Uncertainty and the Theory of Ideal Insurance.
The study of Economics:
• Is a social science• Is focused on so-called rational choices
individuals and groups make regarding their well being
• Makes the assumption that the resources a society holds are limited while its needs are unlimited
• Has the goal of helping social groups use limited resources in ways that achieve the greatest possible sense of well being
Economic thinking is built around three key
questions:
• What products or services to produce?• How to produce these products or
services?• For whom are these products and
services produced?
As a social science Economics started by measuring social welfare and progressed
by theorizing how a society might maximize its social welfare
• In the early 20th century, concepts leading to a construct called Pareto-optimality became the accepted model that economist used when theorizing about social welfare
• The single elegant condition for achieving Pareto optimal was: That balance where someone’s well being could not increased without decreasing another’s.
A 5-step progression from individual consumers to an
entire society’s welfare • Consumer behavior• Production behavior• A depiction of the whole society• Reducing the whole society into an
‘Edgeworth Box’• Comparing a point on Edgeworth’s
contract curve to maximizing a social welfare function