Bài giảng Microeconomics - Chapter 14 The Economics of Public Policy

The Economics of Public Policy0What is Chapter 14 about?1What will public policies actually do ?Basic economic principles can help us to understand what the actual results of public policies will beDepends on actual market structureBut Economics cannot say what policy results should beEach individual has own social values2I. Public Policy Toward Natural MonopolySlide 14 - 33MonopolyCosts of monopolycharges higher pricesrestricts outputimposes dead weight loss on societyHence, many government policies aim to control “natural” monopoliesIncreasing returns to scale mean that in some industries large firm has inherent advantageExample: electricity distribution, water supply4Government Policy OptionsGovernment can:assume ownership & supply directlyattempt to regulate the prices chargedsolicit bids from private firms to providecreate competition by breaking firm upEach alternative has its own problemsIssue: assess relative cost/benefit in actual context5What is a “Natural Monopoly” ?A natural monopoly exhibits economies of scaleImplication: marginal cost will always be less than average costSetting the price equal to marginal cost Is allocatively efficient But would result in an accounting loss6State Ownership and ManagementThe state could take over a natural monopoly in order toSet price equal to marginal costAbsorb losses out of general tax revenuesWhat’s the incentive for cost cutting?Private sector owners benefit in profits Public sector managers’ behavior will depend on the incentives they faceIf promotion depends on cost-cutting, same as privateIf other objectives matter, harder to ensure costs are minimized7State Regulation of Private MonopoliesMost common monopolies in Canada are regulatedElectric utilitiesNatural gas providersLocal telephone companiesCable television companiesGovernments use cost-plus regulationregulated firm is permitted to charge a price equal to its explicit costs of production plus a mark-up to cover the opportunity cost of resources provided by the firm’s owners8Pitfalls of Cost-Plus RegulationCostly administrative proceedingsRegulators fighting with firms over recoverable expendituresBlunts the incentive for cost-saving innovationsFirm gets to keep cost-saving for a one- time period9Exclusive Contracting Government invites private firms to bid for the natural monopolist’s marketGovernment specifies the service it wantsExample: garbage collectionFirms submit bids stating how much they will charge & low bidder wins the contractImplication: incentives to cut costsProblems: specifying contract & monitoring compliance + ensuring competition in biddingComplex or rapidly changing services (e.g. telecommunications) imply contracts infeasible10Vigorous Enforcement of Competition LegislationSome competitive strategies are undesirable:Burning down a competitor’s factory, spreading rumors about a competitor’s productPolicy objective: encourage socially productive competition / discourage unproductive strategiesPredatory pricing is illegal in CanadaSetting price below costs in order to squeeze competitors out of the marketBut competitive pricing is legalAre prices lower because costs are lower?Can be hard to distinguish from predatory pricing11Pricing Public ServicesPublic utility will maximize economic surplus by charging customers the marginal cost of the goods and services it provides i.e, all users should pay a price equal to the highest-cost source in current use12Fig. 14.1The Marginal Cost Curve for Water13Fig. 14.2Seasonal Differences in Electric RatesWinter demandSummer demand14II. Why the Government is Involved in the Health Care SectorSlide 14 - 1515What’s different about the health care sector?People go to cinemas because they enjoy it; they go to doctors because they need informationPatient has symptoms; MD has diagnosisPatient needs the doctor because the doctor knows something the patient doesn’tHealth care is dominated by informational asymmetrySupplier-Induced Demand; Price as Quality signal; Adverse Selection in insurance16Supplier-Induced DemandHealth care providers can influence demand for their servicesMost people come back for a follow-up when their doctor tells them toThis means that supply and demand aren’t independentBest predictor of a particular surgery’s frequency is the number of surgeons in the area who are qualified to do the procedure17Judging Quality by PriceWhat is “quality” in health care? Patients do not have the knowledge to judge directly, so they have to use indirect “signals”If consumers think that the more a service costs, the higher its quality thenThose who want “the best” will often choose the highest-priced physicianImplication: no incentive to cut costs18Adverse SelectionIn private health insurance marketsThe relatively unhealthy will tend to sign upThe relatively healthy won’t find insurance worth the premiumsThis drives up average costs for insurersPremiums go upNow the moderately healthy don’t find insurance worthwhilePrivate health insurance can work only if people are pooled together somehowE.g., by their employer19Administrative CostsPrivate health insurance companies have incentive to offload costs:To make sure they are legally obliged to pay the billTo find the precise cost of insuring each groupThese costs are unnecessary in a public systemCanada’s administrative health care costs are lower than the U.S.’s by about 1.5% of GDP (= $16 Billion)20Health Insurance and the Labour MarketWhen pre-existing ailments are not covered by a new health insurerPeople will be reluctant to change jobs (and hence change health insurers)People will be reluctant to start their own businessesThe labour market is less efficient21Relative Efficiency of Canadian and U.S. Health Care SystemsCanadians have better average health outcomesLife expectancy is two years higherAdult mortality is lower USA 15 year olds have higher chance [25% (male) 30%(female)] of dying before age 60 than Canadian 15 year oldsCanadians spend less on health care9.2% of GDP in Canada vs. 13.9% in the U.S.Half as much per capita as the U.S. in absolute dollarsEven government spending on health care is marginally lower in Canada6.5% of GDP in USA; 6.4% in Canada22Private Insurance and Preventive HealthSome of the biggest gains in health can come from preventive measuresEarly childhood care and nutritionMandatory seat belt lawsBut private insurers have no incentive to incur significant expenses in promoting preventive measures“Co-pay” also implies delay of preventative treatment, which may increase later treatment costs23III. Government Regulation in Other AreasSlide 14 - 2424Environmental RegulationHow should a pollution cleanup effort be distributed among the polluting firms?The most efficient distribution of effort is the one for which each polluter’s marginal cost of abatement is exactly the sameConcentrate pollution reduction in the firms that can accomplish it at least costTaxing pollution or auctioning pollution permits (Requires less information)Optimal strategy depends on industry Multiple sources (e.g. autos) increase costs of permit system25Workplace Safety RegulationMost countries regulate workplace safetyParticularly for risks that individual workers cannot feasibly assess (e.g. hazardous materials)Using cost-benefit analysis helps decision making, because zero risk is infeasibleIssue: when does regulation (e.g. Install safety devices) add more to benefits than to costs ?26Worker’s CompensationWorker’s compensation:An insurance system that provides benefits to workers who are injured on the job (usually government administered)Avoids necessity for court action if injuredIf premiums are “experience rated”, can be viewed as an “injury tax” Ideally, experience rating encourages optimal investment in workplace safety27Addictive GoodsIn most markets, people know what they want and have good reasons to want itThis may not always apply in markets for addictive goodsE.g., gambling, drugsWhat is the appropriate public policy?Do nothingRegulate or tax the goodProhibit the good28GamblingBefore 1970, gambling was illegalRationale: a small minority gambles addictively, jeopardizing health and family financesProponents: gambling is a victimless crimevoluntarymany can gamble in moderationSince legalization, gambling has become much more prevalentHarder for potential addicts to avoid29Outlaw Gambling?Provincial Gambling Revenues now significant $ 5.9% in Nova Scotia - pays for public servicesBut addiction generates social costs elsewhereNo clear accounting of costs / benefitsIf outlawed, residents of a no-gambling province could still play in gambling provincesThe no-gambling province would lose revenueA prisoner’s dilemma for public policy ?30End of Chapter SlidesConcept Maps meant for student printouts follow.Concept Map slides are also available in pdf format.Slide 14 - 3131What is Chapter 14 about?32I. Public Policy Toward Natural Monopoly33II. Why the Government is Involved in the Health Care Sector34III. Government Regulation in Other Areas35Summary of Chapter 1436