DOCSLIB.ORG

Introduc0on to the Economics of Health and Medical Care

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Introduc0on to the Economics of Health and Medical Care Introduc)on to the Economics of Health and Medical Care Session 1A—January 5, 2015 Health Economics PHARM 568 Winter 2015 Co-Coursemasters: Lou Garrison, PhD Norma Coe, PhD 1 Agenda • Course Objec)ves, Overview, and Resources • Economic Way of Thinking • Is Health Care Different? • Microeconomics Reminder • Stylized Facts and StasPcal Overview 2 Course Objecves • Master key economic concepts and analyPcal tools needed to analyze human economic behavior in general. • Understand and apply microeconomic principles to analyze the major issues of the health care sector. • Understand the key insPtuPonal and market factors that affect the incenPves of the stakeholders in the key health care markets. • Understand both the perspecPve and limits of economic analysis applied to health care. • Gain some historical economic perspecPve on the evoluPon of major health policy issues 3 Assignments and Grading Biweekly Homework Assignments A. All students are expected to complete the four weekly homework assignments. Each will require a 500-1000 word short essay of topic of interest. B. All parPcipants will complete a take-home exam midway in the course. C. Final exam will be scheduled for in-class during the scheduled Pme block GRADING: Classroom ParPcipaon 5% Homework assignments 20% Midterm 30% Final Exam 45% Grading will be based on student performance using the grading system for graduate students published in the 2002 - 2004 University of Washington General Catalog for Graduate and Professional Students, pp. 13. 4 Lectures 5 Key Economic Terms and Concepts • Adverse selecon • Experience rang • Opportunity cost • CerPficaon • Externality • Parallel import • Coinsurance • Hyperbolic discounPng • Pareto opPmality • Community rang • Human capital • PosiPve economics • Consumer surplus • Indemnity • Post-experience good • Consumpon • Inferior good • Price discriminaon • Cost efficiency • Informaon asymmetry • Price elasPcity of demand • Cost-benefit analysis • (Internal) rate of return • Private goods • Cost-effecPveness analysis • Internaonal reference pricing • Public goods • Cost-uPlity analysis • Investment good • Reference pricing • Decision fague • Licensure • Residual claimant • Deadweight loss • Loss aversion • Shirking • Deducble • Luxury good • Status quo bias • Defaults • Market concentraon • Sunk cost • Demand • Market failure • Supplier-induced demand • DifferenPal pricing • MonopolisPc compePPon • Tax subsidy • Discount rate • Monopoly • Technical efficiency • Dissipaon of rents • Monosony • TherapeuPc reference pricing • Economic efficiency • Moral hazard • Uncertainty • Economic rents • RBRVS • Welfare economics • Economies of scale • Necessity good • Welfare loss • Economies of scope • Normal good • Equilibrium • Normave economics • Experience good • Nudge 6 Readings Handbooks of Health Economics (Vols IA and IB). Culyer A and Newhouse JP. (eds.) 2000. Handbooks of Health Economics, Vol. 2, Pauly MV, McGuire TG, and Barros PP (eds.), Elsevier/NH, 2011. Here is the UW link to the Handbook of Health Economics: hfp://uwashington.worldcat.org.offcampus.lib.washington.edu/wcpa/oclc/690107506?page=frame&url=hfp %3A%2F%2Fwww.sciencedirect.com%2Fscience%2Fhandbooks%2F15740064%26checksum %3Dd9a3c797d966ba524cd5a34433ea16fd&Ptle=&linktype=digitalObject&detail=:noframes Elgar Companion for Health Economics, Second EdiPon (Andrew Jones.), 2012. Available as e-book in UW library: eb.ebscohost.com.offcampus.lib.washington.edu/ehost/ebookviewer/ebook/ bmxlYmlXzQzMzgxOF9fQU41?sid=e61a1cb4-3012-4e47- a91d-8e3409d482e3@sessionmgr4004&vid=1&format=EB&rid=1 Oxford Handbook of Health Economics (eds. Glied S and Smith PC) 2011. Available as Kindle e-book for $31.49. Other readings are available as electronic journal arcles through Healthlinks. All ar)cles not available through Healthlinks and some of the book chapters will be provided electronically as needed. 7 Resource: Khan Academy 8 Resource: Commonwealth Fund 9 Resource: Kaiser Family Founda)on 10 Sta)s)cal Abstract of the U.S. 12 Economic Report of the President 13 Agenda • Course ObjecPves, Overview, and Resources • Economic Way of Thinking • Is Health Care Different? • Microeconomics Reminder • Stylized Facts and StasPcal Overview 14 What is the economic way of thinking? 15 What is the Economic Way of Thinking? • Fuchs (“Who Shall Live?”, 1974): Economic point of view is rooted in three observaons: 1. “resources are scarce in relaon to human wants” 2. “resources have alternave uses” 3. “people . have different wants” àBasic economic problem: “how to allocate scarce resources so as to best sasfy human wants” Two contrasng points to view: -”RomanPc”—fails to recognize scarcity -”Monotechnic”—only one way to do things 16 Economics vs. Health Economics • Economics is the study of how societies allocate their inherently scarce resources to satisfy the demands of their citizens. • Health economics focuses on how these scarce resources are allocated to produce health and provide the medical services needed • Economics posits that private markets are generally an “efficient” mechanism for allocating resources, maximizing the benefits received from the limited resources • However, in the case of health care markets, a number of special circumstances occur that require special interventions and adaptations to improve efficiency 17 Rise of Health Economics 18 Aims of Economic Analysis— Two General Approaches • PosiPve (or Behavioral Economics)—What “is” and why is it? • Normave—What “should” be? 19 Economic Analysis Strategies— Two General Approaches • Market failure approach—welfare economics • PoliPcal economy approach—theory of interest groups --Both can be used posi>vely or norma>vely. 20 Economic Perspec)ve: Premise and Implicaons • Key Behavioral Premise: – Individuals act to maximize their happiness (i.e., well-being or “welfare”) by choosing among economic goods (or allocang resources so as to best sasfy wants); economists refer to this as maximizing “ulity.” • Simplest mathemacal formulaon (two goods, one period): – Max U(X,Y) subject to income constraint px X+ pyY = I • Where X and Y are quanPPes of goods X and Y, p’s are prices, and I is income • What can you predict from this? àDemand curves slope downward! • Foundaon of ulitarianism (Jeremy Bentham, 1748-1832) 21 Adam Smith’s “Invisible Hand” “...every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoPng it. By preferring the support of domesPc to that of foreign industry, he intends only his own security; and by direcPng that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intenPon. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.” Adam Smith on Self-Interest • Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me what I want, and you shall have this which you want, is the meaning of every such offer; and it is the manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self- love. Efficiency Benchmark—Compe))ve Economy (General Equilibrium Model) • Individuals maximize UPlity [U(x1,..xn)] subject to an income constraint • Firms maximize Profits π=px-c(y1..yn) subject a producPon relaonship x=f(y1..yn) • Everyone a price-taker • Result: Pareto-efficient or Pareto-opPmal • How would you choose between two Pareto-efficient distribuPons? IdealiZed Compe))ve Model (1) • “CollecPve acPon enables society to produce, distribute, and consume a great. “ • Premise: individuals generally act in their own best interest. – “Voluntary agreement”—mostly – Policy analysts concerned with “legiPmate coercive powers of government” IdealiZed Compe))ve Model (2) • Model: Perfectly compePPve economy – Many uPlity-maximizing consumers – Many profit-maximizing producers • Under certain assumpPons, leads to “efficient” global outcome—called “Pareto opPmal” – “It would not be possible to change the paerns [of producPon and consumpPon] in such a way as to make some person befer off without making some other person worse off.” • “Market failures”—violaons of assumpPons that would lead to inefficiency – Raonale for government/policy intervenPon. Implicaons of General Equilibrium Theory: 1. Pareto opmality: “If a compePPve equilibrium exists at all, and if all commodiPes are in fact priced in the market, then the equilibrium is necessarily opPmal in the following precise sense (due to V. Pareto): There is no other allocaon of resources to services which will make all parPcipants befer off.” 2. Income redistribuon: “Operaonally, . if the allocaon mechanism in the real world sasfies the
Load more

Recommended publications
  • IB Economics SL Study Guide
    S T U D Y G UID E SL www.ib.academy IB Academy Economics Study Guide Available on learn.ib.academy Author: Joule Painter Contributing Authors: William van Leeuwenkamp, Lotte Muller, Carlijn Straathof Design Typesetting Special thanks: Andjela Triˇckovi´c This work may be shared digitally and in printed form, but it may not be changed and then redistributed in any form. Copyright © 2018, IB Academy Version: EcoSL.1.2.181211 This work is published under the Creative Commons BY-NC-ND 4.0 International License. To view a copy of this license, visit creativecommons.org/licenses/by-nc-nd/4.0 This work may not used for commercial purposes other than by IB Academy, or parties directly licenced by IB Academy. If you acquired this guide by paying for it, or if you have received this guide as part of a paid service or product, directly or indirectly, we kindly ask that you contact us immediately. Laan van Puntenburg 2a ib.academy 3511ER, Utrecht [email protected] The Netherlands +31 (0) 30 4300 430 TABLE OF CONTENTS Introduction 5 1. Microeconomics 7 – Demand and supply – Externalities – Government intervention 2. Macroeconomics 29 – Overall economic activity – Aggregate demand and aggregate supply – Macroeconomic objectives – Government Intervention 3. International Economics 53 – Trade – Exchange rates – The balance of payments 4. Development Economics 65 – Economic development – Measuring development – Contributions and barriers to development – Evaluation of development policies 5. Definitions 77 – Microeconomics – Macroeconomics – International Economics – Development Economics 6. Abbreviations 93 7. Essay guide 97 – Time Management – Understanding the question – Essay writing style – Worked example 3 TABLE OF CONTENTS 4 INTRODUCTION The foundations of economics Before we start this course, we must first look at the foundations of economics.
    [Show full text]
  • Indirect Taxes for Redistribution: Should Necessity Goods Be Favored?
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Boadway, Robin; Pestieau, Pierre Working Paper Indirect taxes for redistribution: Should necessity goods be favored? CESifo Working Paper, No. 3667 Provided in Cooperation with: Ifo Institute – Leibniz Institute for Economic Research at the University of Munich Suggested Citation: Boadway, Robin; Pestieau, Pierre (2011) : Indirect taxes for redistribution: Should necessity goods be favored?, CESifo Working Paper, No. 3667, Center for Economic Studies and ifo Institute (CESifo), Munich This Version is available at: http://hdl.handle.net/10419/54927 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Indirect Taxes for Redistribution: Should Necessity Goods be Favored? Robin Boadway Pierre Pestieau CESIFO WORKING PAPER NO.
    [Show full text]
  • Identity, Morals and Taboos: Beliefs As Assets
    IDENTITY, MORALS, AND TABOOS: BELIEFS AS ASSETS∗ ROLAND BENABOU´ AND JEAN TIROLE We develop a theory of moral behavior, individual and collective, based on a general model of identity in which people care about “who they are” and in- fer their own values from past choices. The model sheds light on many empir- ical puzzles inconsistent with earlier approaches. Identity investments respond nonmonotonically to acts or threats, and taboos on mere thoughts arise to protect beliefs about the “priceless” value of certain social assets. High endowments trig- ger escalating commitment and a treadmill effect, while competing identities can cause dysfunctional capital destruction. Social interactions induceboth social and antisocial norms of contribution, sustained by respectively shunning free riders or do-gooders. JEL Codes: D81, D91, Z13. “Man naturally desires . notonly praise, but praiseworthiness; or to be that thing which, though it should be praised by nobody, is, however, the natural and proper object of praise. He dreads, not only blame, but blame-worthiness; or to be that thing which, though it should be blamed by nobody, is, however, the natural and proper object of blame . .” “When I endeavour to examine my own conduct, when I endeav- our to pass sentence upon it, and either to approve or condemn it, it is evident that, in all such cases, I divide myself, as it were, into two persons: and that I, the examiner and judge, represent a different character from that other I, the person whose conduct is examined and judged of . .. The first is the spectator, whose sentiments with regard to my own conduct I endeavour to enter into, by placing my- self in his situation, and by considering how it would appear to me, whenseenfromthat particularpoint ofview.
    [Show full text]
  • IB Economics HL Study Guide
    S T U D Y G UID E HL www.ib.academy IB Academy Economics Study Guide Available on learn.ib.academy Author: Joule Painter Contributing Authors: William van Leeuwenkamp, Lotte Muller, Carlijn Straathof Design Typesetting Special thanks: Andjela Triˇckovi´c This work may be shared digitally and in printed form, but it may not be changed and then redistributed in any form. Copyright © 2018, IB Academy Version: EcoHL.1.2.181211 This work is published under the Creative Commons BY-NC-ND 4.0 International License. To view a copy of this license, visit creativecommons.org/licenses/by-nc-nd/4.0 This work may not used for commercial purposes other than by IB Academy, or parties directly licenced by IB Academy. If you acquired this guide by paying for it, or if you have received this guide as part of a paid service or product, directly or indirectly, we kindly ask that you contact us immediately. Laan van Puntenburg 2a ib.academy 3511ER, Utrecht [email protected] The Netherlands +31 (0) 30 4300 430 TABLE OF CONTENTS Introduction 5 1. Microeconomics 7 – Demand and supply – Externalities – Government intervention – The theory of the firm – Market structures – Price discrimination 2. Macroeconomics 51 – Overall economic activity – Aggregate demand and aggregate supply – Macroeconomic objectives – Government Intervention 3. International Economics 77 – Trade – Exchange rates – The balance of payments – Terms of trade 4. Development Economics 93 – Economic development – Measuring development – Contributions and barriers to development – Evaluation of development policies 5. Definitions 105 – Microeconomics – Macroeconomics – International Economics – Development Economics 6. Abbreviations 125 7. Essay guide 129 – Time Management – Understanding the question – Essay writing style – Worked example 3 TABLE OF CONTENTS 4 INTRODUCTION The foundations of economics Before we start this course, we must first look at the foundations of economics.
    [Show full text]
  • Reasonable Groundwater Pumping Levels Under the Appropriation Doctrine: Underlying Social Goals
    Volume 23 Issue 1 Winter 1983 Winter 1983 Reasonable Groundwater Pumping Levels under the Appropriation Doctrine: Underlying Social Goals Douglas L. Grant Recommended Citation Douglas L. Grant, Reasonable Groundwater Pumping Levels under the Appropriation Doctrine: Underlying Social Goals, 23 Nat. Resources J. 53 (1983). Available at: https://digitalrepository.unm.edu/nrj/vol23/iss1/6 This Article is brought to you for free and open access by the Law Journals at UNM Digital Repository. It has been accepted for inclusion in Natural Resources Journal by an authorized editor of UNM Digital Repository. For more information, please contact [email protected], [email protected], [email protected]. Douglas L. Grant* Reasonable Groundwater Pumping Levels Under the Appropriation Doctrine: Underlying Social Goalst INTRODUCTION This is the second of two articles dealing with reasonable groundwater pumping level regulation in appropriation doctrine states.' The earlier article reported that most appropriation doctrine groundwater codes pro- tect senior well owners in the maintenance of reasonable pumping levels, but the codes give little specific guidance on how to apply that criterion. The objective of both articles is to help fill the need for a means of measuring reasonableness. The first article summarized notable features of the reasonable pumping level statutes in different appropriation doctrine states and then focused on the economic dimension of the reasonable pumping level concept. It suggested that the pumping level statutes could be construed to set a goal of optimum economic development, i.e., an economically efficient al- location of the groundwater resource. The earlier article then considered the use of cost-benefit analysis to pursue the goal of economic efficiency.
    [Show full text]
  • 1 Economics 100A: Microeconomic Analysis Fall 2001 Problem Set 4
    Economics 100A: Microeconomic Analysis Fall 2001 Problem Set 4 (Due the week of September 24) Answers 1. An inferior good is defined as one of which an individual demands less when his or her income rises and more when his or her income falls. A normal good is defined as one of which an individual demands more when his or her income increases and less when his or her income falls. A luxury good is defined as one for which its demand increases by a greater proportion than income. A necessary is defined as one for which its demand increases by a lesser proportion than income. The same good can be both normal and inferior. For instance, a good can be normal up to some level of income beyond which it becomes inferior. Such a good would have a backward-bending Engel curve. 2. (a) Table 2. Percentage Allocation of Family Budget Income Groups A B C D E Food Prepared at Home 26.1 21.5 20.8 18.6 13.0 Food Away from Home 3.8 4.7 4.1 5.2 6.1 Housing 35.1 30.0 29.2 27.6 29.6 Clothing 6.7 9.0 9.8 11.2 12.3 Transportation 7.8 14.3 16.0 16.5 14.4 (b) All of them. (c) Food away from home, clothing and transportation. (d) Food prepared at home and housing. (e) The graph below depicts the Engel curve for food away from home (a luxury good). (f) The graph below depicts the Engel curve for food prepared at home (a necessity good).
    [Show full text]
  • Justice As a Public Good Provision
    GSJ: VOLUME 6, ISSUE 7, July 2018 289 GSJ: Volume 6, Issue 7, July 2018, Online: ISSN 2320-9186 www.globalscientificjournal.com FACTORS INFLUENCING THE EEFICIENCY OF JUDICIARY A PUBLIC GOOD PROVISION Manurut Lochav, Dr. Mahua Bhatacharjee Abstract There are three pillars of Indian democracy namely, executive, legislature and judiciary. Judiciary as a pillar of democracy upholds the law. This paper aims to trace the roots of judiciary as a public good. Justice is an indicator of well-being of the economy. The judicial system has seen radical changes. The supply and demand side of judiciary has been on a rise in the last few decades. In the paper key characteristics of a public good have been examined and it is seen that judiciary does categories as a public good. The provision of a well-functioning and efficient judicial system acts as a pedestal for smooth and continuous growth of a country. The paper builds its findings on a primary survey where in responses show that as per public opinion efficiency was reducing in judicial system of India. The primary data is further supported by the secondary data which has been sourced from the judicial institutes itself. There are several factors which have been identified to be the leading cause of reducing efficiency in judiciary. The paper examines these factors in detail and tries to draw a link between these factors and judicial efficiency based on secondary data. The findings of the paper reveal that judiciary is indeed a public good whose efficiency has been decreasing. It sheds light on judiciary which needs funding and attention from the government so to ensure social equality and justice in the country.
    [Show full text]
  • “SNOB VALUE” an Anthropological Investigation on Motives for Luxury Consumption
    SENIOR ESSAY IN THE DEPARTMENT OF ANTHROPOLOGY AT YALE UNIVERSITY “SNOB VALUE” An Anthropological Investigation on Motives for Luxury Consumption Alina T. Nevins May 2, 2008 Table of Contents Introduction.....................................................................................................................5 The Nature of Luxury......................................................................................................7 Luxury Brands and Economics ............................................................................8 Ornamentation.................................................................................................................9 A Little about Tiffany & Co. .........................................................................................11 Tiffany & Co.’s Marketing Aims .......................................................................12 Methods ........................................................................................................................13 Explanations of Luxury .................................................................................................15 Social Meanings and Semiotics..........................................................................15 Socioeconomic Explanations of ‘Non-functional Demand’ ................................16 The Luxury Good as ‘Superfluous’ ....................................................................17 Luxury and Pleasure ..........................................................................................20
    [Show full text]
  • Microeconomics I
    MICROECONOMICS I. ELTE Faculty of Social Sciences, Department of Economics Microeconomics I. week 9 CONSUMPTION AND DEMAND, PART 3 Authors: Gergely K®hegyi, Dániel Horn, Klára Major Supervised by Gergely K®hegyi June 2010 week 9 K®hegyi-Horn-Major Applications and extensions of demand theory The course was prepaerd by Gergely K®hegyi, using Jack Hirshleifer, Amihai Glazer and David Hirshleifer (2009) Mikroökonómia. Budapest: Osiris Kiadó, ELTECON-books (henceforth HGH), and Gábor Kertesi (ed.) (2004) Mikroökonómia el®adásvázlatok. http://econ.core.hu/ kertesi/kertesimikro/ (henceforth KG). Income elasticity of demand week 9 K®hegyi-Horn-Major Applications and How does the demanded quantity react to the change in income? extensions of demand theory For any good X the change in consumption ∆I due to a change in income x could be measured by the ratio ∆x . ∆ ∆I (This ratio is the slope of the Engel curve over the relevant range) Problem: ∆x is sensitive to the units of measurement. ∆I e.g.: income raises by 100 HUF, and then we consume 5 dkg=0,05 kg more butter. h i Then ∆x 0 05, if we use dkg ∆I = ; Ft h i and ∆x 0 0005, if we use kg ∆I = ; Ft This can cause trouble, especially if we want to compare the income sensitivity of dierent goods. (e.g. pieces of watermelon and apple, or grams of coee and bags of tea) Income elasticity of demand (cont.) week 9 K®hegyi-Horn-Major Denition Applications and The income elasticity of demand ( ) is the proportionate change extensions of "x demand theory in the quantity purchased divided by the proportionate change in income.
    [Show full text]
  • Luxury Good Demand
    Luxury Good Demand Author: Kimberly Caserta Persistent link: http://hdl.handle.net/2345/572 This work is posted on eScholarship@BC, Boston College University Libraries. Boston College Electronic Thesis or Dissertation, 2008 Copyright is held by the author, with all rights reserved, unless otherwise noted. Luxury Good Demand Kim Caserta Adviser: Robert Murphy 1. Introduction Luxury goods account for a growing share of consumer expenditure. The luxury good industry, which produces and sells clothes, leather goods, shoes, silk scarves and neckties, watches, jewelry, perfume, and cosmetics, reached the $157 billion mark in 2007 [Thomas (2007) p. 5]. A strengthening economy plus more disposable income among other things has led this market to realize significant growth in recent years. Consistently with the empirical evidence on the faster increase of the income and wealth of the top 1% relative to the rest of the population, the growth rate of the luxury goods market has far exceeded that of aggregate consumption over the past decade [see Aït- Sahalia, Y., Parker, J. and Yogo, M. (2003)]. Consumers are buying up everything from expensive clothes and diamond-encrusted handbags to private jets and designer toilets. The desire for luxury goods in America has reached a point that consumers will use any and all resources to get their hands on them. Despite the emotional trauma and economic devastation, “in September 2005, victims of Hurricane Katrina used their Red Cross cards to buy $800 bags at the Louis Vuitton boutique in Atlanta” [Thomas (2007) p.169]. As economist Robert Frank has pointed out, Americans are in the grip of “Luxury Fever.” Although there has been much observation of the consumer luxury good trend in the United States, it is not clear what factors are causing this trend which is what I tend to explore.
    [Show full text]
  • WTP Estimates to Reflect Changes in Real Income
    MEMORANDUM June 3, 1999 TO: Jim DeMocker, EPA FROM: Naomi Kleckner and Jim Neumann, IEc SUBJECT: Recommended Approach to Adjusting WTP Estimates to Reflect Changes in Real Income As part of the on-going effort to refine the economic valuation methodology of the 812 prospective analyses, IEc and the Agency have proposed adjusting willingness-to-pay (WTP) measures to reflect the expected increase in real income over the period, 1990 to 2010. This approach would result in an upward adjustment to more accurately reflect the valuation of improved health as income increases over time. However, application of this adjustment to benefits estimation requires extensive incorporation of new literature to ensure that applied estimates reflect sound methodology consistent with those of the 812 prospective. This memorandum presents our recommended approach for implementing an income-growth adjustment. The first section addresses economic issues associated with estimating income elasticity and expectations of whether improvements in health status are luxury or necessity goods. The second section, Estimates of Income Elasticity of WTP, reviews studies that present income elasticity estimates and discusses their strengths and weaknesses. The final section presents our recommendations for incorporating the results of this review in the 812 prospective analysis and some illustrative examples of the potential effects of this adjustment on benefit estimates. We then conclude the memorandum with comments on critical uncertainties affecting the interpretation of the results. 1 BACKGROUND There is some intuitive appeal to the general impression that environmental improvements are luxury goods. McFadden and Leonard (1992) write, "Environmental protection should be a 'luxury good' that in poor families is displaced by basic needs for food and shelter, and in wealthy families more affordable" (sic).
    [Show full text]
  • Asymmetric Substitutability: Theory and Some Applications
    Tjalling C. Koopmans Research Institute Tjalling C. Koopmans Research Institute Utrecht School of Economics Utrecht University Janskerkhof 12 3512 BL Utrecht The Netherlands telephone +31 30 253 9800 fax +31 30 253 7373 website www.koopmansinstitute.uu.nl The Tjalling C. Koopmans Institute is the research institute and research school of Utrecht School of Economics. It was founded in 2003, and named after Professor Tjalling C. Koopmans, Dutch-born Nobel Prize laureate in economics of 1975. In the discussion papers series the Koopmans Institute publishes results of ongoing research for early dissemination of research results, and to enhance discussion with colleagues. Please send any comments and suggestions on the Koopmans institute, or this series to [email protected] ontwerp voorblad: WRIK Utrecht How to reach the authors Please direct all correspondence to the first author. Kris De Jaegher Utrecht University Utrecht School of Economics Janskerkhof 12 3512 BL Utrecht The Netherlands E-mail: [email protected] This paper can be downloaded at: http://www.koopmansinstitute.uu.nl Utrecht School of Economics Tjalling C. Koopmans Research Institute Discussion Paper Series 08-02 Asymmetric substitutability: theory and some applications Kris De Jaegher Utrecht School of Economics Utrecht University January 2008 Abstract Economists usually describe goods as being either (gross) complements or (gross) substitutes. Yet, what is less known is that one good may be a gross substitute for a second good, while the second good is a gross complement to the first good. This paper shows the existence of asymmetric gross substitutability, and shows some potential examples and applications.
    [Show full text]