Download CHP 17. GOVERNMENT & MARKET FAILURE

MARKET GOVERNMENT GOVERNMENT
FAILURE INTERVENTION FAILURE
EXTERNALITY PUBLIC ENTERPRISE
-PUBLIC GOODS-NATIONALIZATION
MARKET
-PRIVATIZATION
POWER
REGULATION
INEQUITIES
- OUTPUT
DYNAMIC
- PRICE
MKT. FAIL.
- STANDARDS
INDIVISIBILITY ANTITRUST
INFORMATION
-STRUCTURE
ASYMMETRY -CONDUCT
TAXES (SUBSIDIES)
PROVISION OF
INFORMATION
RATIONING (MONEY)
ADMINISTRATIVE
COST
COMPLIANCE
COST
EFFICIENCY COST
- NEGATIVE EXTER.
-PUBLIC BADS
- MKT POWER
- INEQUITIES
- DYNAMIC
- INDIVISIBILITY
- INFORMATION
Learning, Leadership and Service in the Jesuit Tradition
Slide 1
EXTERNALITIES: impacts on third parties
besides the buyer and seller.
CONSUMPTION EXTERNALITIES: impacts
on third parties as a result of the consumption
of a good. Eg. Each infected person who takes
Drugs eliminates disease helps all of society, not
Just the drug company which provides the medicine
PRODUCTION EXTERNALITIES: impacts
on third parties as a result of the production of
a good. Eg. New discoveries & innovations
impact all of Society, not just the scientist who
disovers them and the firm who employs the
Scientist (streptomyacin patent problem)
Learning, Leadership and Service in the Jesuit Tradition
Slide 2
MARKET POWER: The power of a single
Company to change the price of a good
Or service in the market place.
includes:
MONOPOLY, MONOPOLISTIC
COMPETITION, BILATERAL MONOPOLY.
Examples: Drug Companies while they have
Patents.
Learning, Leadership and Service in the Jesuit Tradition
Slide 3
INEQUITIES: any economic, social or political
mechanism that systematically causes one part of
the population to be worse off than another part
of a population through time without the possibility
of correction.
Examples: Poor Populations have greater
vulnerability to TB due to their economic and
social conditions.
Learning, Leadership and Service in the Jesuit Tradition
Slide 4
DYNAMIC MARKET FAILURE: the failure
through time to achieve technological change
and the failure of the market to achieve stable,
equilibrium outcomes.
Examples: As a disease disappears in a given
locale:
-lack of incentives for new drug development
-Lack of treatment for those who are diseased
both in the area and in other areas where
pandemics may occur
Learning, Leadership and Service in the Jesuit Tradition
Slide 5
INDIVISIBILITIES: a problem cannot be subdivided into smaller pieces for the purpose of
solving the problem or marketing the solution
Example: even one remaining infected person
means no cure has been achieved. any plan to
wipe out a disease means that a comprehensive
world wide plan must be undertaken.
Learning, Leadership and Service in the Jesuit Tradition
Slide 6
INFORMATION ASYMMETRY: decision
makers do not have access to the same information
which leads to different definitions, boundaries,
and solutions to problems to be solved and
social outcomes.
Examples: indifference to disease, lack of education
about how to treat diseases, and failure to understand
the tradeoff between private rights and public
goods.
Learning, Leadership and Service in the Jesuit Tradition
Slide 7
MARKET
FAILURE
Tuberculosis
Example
EXTERNALITY
-PUBLIC GOODS
MARKET
POWER
INEQUITIES
DYNAMIC
MKT. FAIL.
INDIVISIBILITY
INFORMATION
ASYMMETRY
Third party: healthy population
TB tests, Drugs, Hospitals, Ventilation Systems
Drug Companies, Patents
Poor Populations have greater vulnerability
Lack of incentives for new drug development
As disease becomes less threatening
Even one infected person means no cure
Indifference, lack of education, personal vs.
public good.
Learning, Leadership and Service in the Jesuit Tradition
Slide 8
Public Enterprise: The government provides the
Service instead of the market.
• Nationalization: Government takes over private
enterprises
Examples: Move to single payor system
•Privatization: Government sells off government
enterprises to the private market
Examples: Sell off Veterans Administration
Hospitals
Learning, Leadership and Service in the Jesuit Tradition
Slide 9
REGULATION: Government determines how
Market outcomes are to be limited.
*output regulation: Government sets quotas or
Limits the amount of output that can be provided
By participants in a market.
Examples: prohibition of bogus cures
*price regulation: Government sets price controls
Either as minimum or maximum prices that can
Be charged in a market.
Examples: price controls on drugs
*standards regulation: Government sets limits on
The characteristics of a product or service
Examples: FDA regulations on advertising & quality
Learning, Leadership and Service in the Jesuit Tradition
Slide 10
ANTITRUST: the government limits the structure
and conduct of firms in the market instead of
market performance such as output and price.
• Structure: Government examines all mergers
Examples: Hospital, drug co. mergers
•Conduct: Government limits conspiracies to fix
prices
Examples: Drug company pricing
Learning, Leadership and Service in the Jesuit Tradition
Slide 11
Subsidies: Government provides money to
provide incentives for certain market outcomes
Examples: Medicare, Medicaid, Free Drugs
(Isoniazid, Myambutol)
Taxes: Government collects money to provide
revenues for government services and to
discourage certain market outcomes.
Examples: Income Taxes
Learning, Leadership and Service in the Jesuit Tradition
Slide 12
PROVISION OF INFORMATION: Government
provides information that the market otherwise
Would not provide
Examples: Data on extent of TB
RATIONING: Government determines market
Signals that will determine how distribution of
goods or services is to occur
Examples: TB drugs and treatment
Learning, Leadership and Service in the Jesuit Tradition
Slide 13
GOVERNMENT TUBERCULOSIS
INTERVENTION
EXAMPLE
PUBLIC ENTERPRISE
-NATIONALIZATION
-PRIVATIZATION
REGULATION
- OUTPUT
- PRICE
- STANDARDS
ANTITRUST
-STRUCTURE
-CONDUCT
TAXES (SUBSIDIES)
PROVISION OF
INFORMATION
RATIONING
SINGLE PAYOR SYSTEM
SELL OFF VA HOSPITALS
ISOLATION, QUARANTINE
PROHIBITION OF BOGUS CURES
PRICE CONTROLS ON DRUGS
FDA Regulations on Advertising, Quality
HOSPITAL, DRUG CO. MERGERS
PRICE FIXING,
MEDICARE, MEDICAID,FREE DRUGS
(ISONIAZID, MYAMBUTOL)
PUBLIC HEALTH INFORMATION,
DATA ON EXTENT OF TB
Learning, Leadership and Service in the Jesuit Tradition
Slide 14
GOVERNMENT TUBERCULOSIS
FAILURE
EXAMPLE?
ADMINISTRATIVE
COST
COMPLIANCE
COST
EFFICIENCY COST
*How much it costs the government to
Intervene.
*How much it costs the private sector
To comply with government intervention
*How much is lost in efficiency of service
As a result of government intervention
Learning, Leadership and Service in the Jesuit Tradition
Slide 15
GOVERNMENT FAILURE
ADMINISTRATIVE COST
COMPLIANCE COST
EFFICIENCY COST
-ANDAll of the Market Failures as well!!!
NEGATIVE EXTER.
PUBLIC BADS
MKT POWER
INEQUITIES
DYNAMIC
INDIVISIBILITY
INFORMATION
ASYMETRY
Learning, Leadership and Service in the Jesuit Tradition
Slide 16
Annual movement of persons 65 and over through the healthcare system
* Paul Densen (Milbank Quarterly, V65 #4, 1987
1000
22000 22000
80000 49000
50- 200100 400
Physician
2200026000
300400
25-50
Community
Care Agency
44000 Discharges
31000 Persons
500-2900
6
Acute Care Hospital
Chronic
Disability
Rehab Facility
1400-2900
40
40-70
1400
Nursing Home
200-800
1000
8
1522
300
3000
7-12
1100
Dental
Care
39600
100,000 Persons 65 and Over
Deaths
(5114)
2
22
72
14
Inpatient Mental
Health Facility
Annual movement of persons 65 and over through the healthcare system
* Paul Densen (Milbank Quarterly, V65 #4, 1987
1000
22000 22000
80000 49000
50- 200100 400
Physician
2200026000
300400
25-50
Community
Care Agency
44000 Discharges
31000 Persons
500-2900
6
Acute Care Hospital
Chronic
Disability
Rehab Facility
1400-2900
40
40-70
1400
Nursing Home
200-800
1000
8
1522
300
3000
7-12
1100
Dental
Care
39600
100,000 Persons 65 and Over
Deaths
(5114)
2
22
72
14
Inpatient Mental
Health Facility
GOVERNMENT STUDIES
Type of
Study
Objective of
Study
Definition and Focus
Implicit
Constraints
Cost Benefit
Analysis
Net Social
Benefit must
be positive
Multiple
social
objectives
Minimizes
costs on the
regulated
Maximize
regulatory
objective
Minimizes
ratio of net
cost to net
effectiveness
Maximize net
govt. surplus
Benefits & costs
included to whomever
occurring
Includes cost benefit
analysis and other
studies
Examines price,
output, financial, &
employment impacts
Defines degree of
regulation that will
shut firms down
Maximizes efficiency
in achieving objective
None
Regulatory
Impact
Analysis
Economic
Impact
Analysis
Closure
Analysis
Cost
Effectiveness
Analysis
Fiscal Impact
Analysis
Focuses only on
government finances
Problem
________
Requires measurement of
all benefits & costs.
Ignores unmeasurable ones
Environmental &
Goes beyond cost-benefit,
other constraints
but becomes very
subjective
arbitrary limits on Regulation discouraged.
acceptable costs of Ignores most social
compliance
benefits and costs
Implicitly, firms
Over regulates profitable,
are not to be shut
under regulates
down
unprofitable
Budget or cost
Comparisons difficult
constraint of
when objectives
organization
(“effectiveness”) differ
across programs
Govt. revenue
Ignores full costs &
must exceed cost
benefits to society
PRIVATE (for profit) STUDIES
Type of
Study
Objective of
Study
Definition and Focus
Private Cost
Benefit
Analysis***
Regulatory
Impact
Analysis
Economic
Impact
Analysis***
Closure
Analysis***
Net Social
Benefit must
be positive
Multiple
social
objectives
Maximizes
costs on the
regulated
Minimizes
regulatory
objective
Minimizes
ratio of net
cost to net
effectiveness
Maximize net
govt. surplus
Private benefits &
costs ONLY
Cost
Effectiveness
Analysis
Fiscal Impact
Analysis
Includes cost benefit
analysis and other
studies
Examines price,
output, financial, &
employment impacts
Defines degree of
regulation that will
shut firms down
Maximizes efficiency
in achieving objective
Focuses only on
government finances
Implicit
Constraints
None
Problem
________
Requires measurement of
all benefits & costs.
Ignores unmeasurable ones
Environmental & Goes beyond cost-benefit,
other constraints
but becomes very
subjective
arbitrary limits on Regulation discouraged.
acceptable costs of Ignores most social
compliance
benefits and costs
Implicitly, firms
Over regulates profitable,
are not to be shut under regulates
down
unprofitable
Budget or cost
Comparisons difficult
constraint of
when objectives
organization
(“effectiveness”) differ
across programs
Govt. revenue
Ignores full costs &
must exceed cost
benefits to society
*** Focuses only on private costs and benefits, not public costs and benefits
PRIVATE (for profit) STUDIES
Type of
Study
Objective of
Study
Definition and Focus
Implicit
Constraints
Cost Benefit
Analysis
Net Social
Benefit must
be positive
Minimizes
ratio of net
cost to net
effectiveness
Maximize
Revenue
Benefits & costs
included to whomever
occurring
Maximizes efficiency
in achieving objective
None
Cost
Effectiveness
Analysis
Market,
Demand
Analysis
Production,
Engineering
Studies
Capital
Budgeting
Maximize
Productivity
Maximize net
present value
Increasing number of
buyers and size of
market
Increase technical
efficiency (output of
service per input)
Future stream of net
cash flows is the focus
***Similar to studies by the government
***Limited only to costs and benefits affecting the organization
Budget or cost
constraint of
organization
Potential buyers,
competitors, &
market boundaries
Input and
technological
Ability to borrow,
interest rates
Problem
Requires measurement of
all benefits & costs.
Ignores unmeasurable ones
Comparisons difficult
when objectives
(“effectiveness”) differ
across programs
Ignores even private firm’s
costs. Whatever the buyer
wants (Drug Cos.)
May sacrifice
unmeasurable output (eg.
quality)- (Managed Care)
Only costs and benefits
affecting stockholders
matter (for-profit hospitals)
Terminal Care Depends upon Who
does the Ultimate Financing:
Government or Private Third Party
Payors
• Cost Effectiveness Analysis is similar
• Cost Benefit Analysis: costs and benefits
are different: stockholders vs. society
• Many kinds of specialized studies that apply
to one type of organization only
MARKET GOVERNMENT GOVERNMENT
FAILURE INTERVENTION FAILURE
EXTERNALITY PUBLIC ENTERPRISE
-PUBLIC GOODS-NATIONALIZATION
MARKET
-PRIVATIZATION
POWER
REGULATION
INEQUITIES
- OUTPUT
DYNAMIC
- PRICE
MKT. FAIL.
- STANDARDS
INDIVISIBILITY ANTITRUST
INFORMATION
-STRUCTURE
ASYMMETRY -CONDUCT
TAXES (SUBSIDIES)
PROVISION OF
INFORMATION
RATIONING (MONEY)
MARKET GOVERNMENT GOVERNMENT
FAILURE INTERVENTION FAILURE
EXTERNALITY PUBLIC ENTERPRISE
-PUBLIC GOODS-NATIONALIZATION
MARKET
-PRIVATIZATION
POWER
REGULATION
INEQUITIES
- OUTPUT
DYNAMIC
- PRICE
MKT. FAIL.
- STANDARDS
INDIVISIBILITY ANTITRUST
INFORMATION
-STRUCTURE
ASYMMETRY -CONDUCT
TAXES (SUBSIDIES)
PROVISION OF
INFORMATION
RATIONING (MONEY)
ADMINISTRATIVE
COST
COMPLIANCE
COST
EFFICIENCY COST
- NEGATIVE EXTER.
-PUBLIC BADS
- MKT POWER
- INEQUITIES
- DYNAMIC
- INDIVISIBILITY
- INFORMATION