Transcript Ch11 - YSU

Economics of Public Policy
– Labor Market Equilibrium
– Economics of Health Care
– Public Goods
1
Labor Market Equilibrium
 Understand the relationship between wages and the
marginal productivity of workers
 Analyze how wages and employment are determined
in competitive labor markets
2
The Labor Market
• Marginal product of labor (MP)
– The additional output a firm gets by employing one
additional unit of labor
• Value of marginal product of labor (VMP)
– The dollar value of the additional output a firm gets
by employing one additional unit of labor
• In a competitive market,
wage = VMP
3
Adiron Woodworking Company
• Makes cutting boards from free scrap wood
– Price of a cutting board is $20
• Going wage is $350 per week
# of Workers
Output
0
0
1
2
3
4
5
30
55
76
94
108
MP
VMP
30
$600
25
500
21
420
18
360
14
280
4
Adiron Woodworking Company
• The company will hire workers until the value of the
marginal product of the last worker is equal to the wage
– Cost-Benefit Principle
– Workers earn $350 per week
• Adiron will hire four
# of Workers
VMP
workers
1
$600
– The fifth worker costs
2
500
more ($350) than the
3
420
benefits he delivers ($280)
4
360
5
280
5
Firm 1
12
D1 = VMP1
12
D = VMP1 +
VMP2
6
100 150
Wage ($/hour)
Market
12
Firm 2
Wage ($/hour)
Wage ($/hour)
Demand for Labor
6
D2 = VMP2
6
150
250
Total Employment
50 100
Work hours/day
6
Individual Labor Supply
• Individuals trade-off income and leisure
– More work hours means more income AND less
leisure
• Suppose the wage increases
– Substitution effect: work more
• Leisure is more expensive
– Income effect: work less
• Purchasing power increases for a given work
schedule
– A higher wage may increase or decrease the quantity
of labor supplied by the individual
7
Labor Supply of Programmers
S
Wage ($/hour)
• Labor supply for a single
profession has a positive
slope
– Higher wages attract
workers from other
careers
• An increase in wages from
W1 to W2 increases
quantity of labor supplied
from L1 to L2
– Movement along the
labor supply curve
W2
W1
L1 L2
Employment of programmers
(work-hours/year)
8
Equilibrium in the Labor Market of
Programmers
• Demand for programmers
increases from D1 to D2
– Initial impact is a shortage
of programmers at W1
– In the short-run, wages are
bid up to W3
• In the long run
– Movement up the supply
curve and down the
demand curve
– Quantity of labor supplied
increases from L1 to L2
– Wages settle at W2
W3
S
W2
W1
D2
D1
L1
L2
Employment of programmers
(work-hours/year)
9
Health Care Delivery
• Health care spending has grown faster
than income
– Up from 4% of national income in 1940 to
14% in 2005
– Part of the increase is due to improved quality
of tests, procedures, drugs, etc.
– Part is due to the third-party payment system
• Growth in use of insurance for payments
– Employer-provided and government-provided
10
Health Care Delivery
• Cost-benefit test assures efficient allocation of health
care
– Perform a service only if the benefit exceeds the cost
• Costs are easy to measure
• Benefits are complicated
– Usual measure is willingness to pay marginal cost
• Some patients are unable to pay for basic services
– Society assumes some responsibility via
government-provided insurance
– Confused by third-party payment system
11
• Price of hospital room is
$300 per day
– If David pays, MC to
him is $300
– David equates marginal
cost and marginal
benefit and stays
one day
– If insurance pays, MC to
David is zero
• He stays 3 days
Price ($/day)
The Demand for Hospital Care
300
D
1
3
Length of hospital stay (days)
12
Full Insurance Coverage Creates Waste
• If David pays, stay is 1 day
• If insurance pays, stay is 3 days
– Extra benefit of 2nd and 3rd day to David is
$300
– Extra cost is 2 days times $300 per day =
$600
– $300 surplus lost
Alternative Coverage Scheme
Price ($/day)
• Insurance company pays
300
David $700
– Insurance company
saves $200 compared
D
to a 3-day stay
1
3
• David stays 1 day
Length of hospital stay (days)
– Pays hospital $300
– David keeps $400
• The $300 benefit he would get from staying 3 days
PLUS $100 pure surplus
• Total surplus increases $300
Policy Implications
• Research shows that when individuals pay for
their health care, they consume less
• An more efficient system can be designed
– Adopt a system of high deductible health
insurance
– Use stipend payments for the poor
• An efficient policy will increase the size of the
health care pie
Public Goods
• Government is the only organization with the power to
compel actions
– Taxes
– Military service
– Imprison people
• All other institutions – family, business, charitable
organizations, etc. – rely on voluntary transactions
• Government decisions can be analyzed using
economic principles
Public Goods
• Public good is a good that is both nonrival and
nonexcludable
– A nonrival good is one whose consumption by one
person does not diminish its availability to others
• National defense ; Economics lectures
– A non-excludable good is one that is difficult or
costly to exclude non-payers from consuming
• Over-the-air broadcasts; Fireworks displays
• A pure public good is, to a high degree, both nonrival
and nonexcludable.
Public Goods and Government
• A collective good is a good or service that, to at least
some degree, is nonrival but excludable
– Sometimes provided by government
• A good is a pure private good if
– Non-payers can easily be excluded and
– Each unit consumed by one person means one less
unit available for others
• A pure commons good is a rival good that is
nonexcludable
 Fish in open water
Types of Goods
Paying for Public Goods
• Not everyone benefits equally from a public good or
service.
• Example
– Prentice and Wilson have adjacent properties
• Fighting zebra mussel infestation
• New device to control mussels is $1,000 to serve
both properties
• Wilson's income is higher and value device at $800
• Prentice values device at $400
Paying for Public Goods
• Equal sharing of costs with a head tax
• A head tax is a tax that collects the same amount
from every taxpayer
• Result: no new device
– $500 is more than Prentice's reservation price
• Prentice vetoes device
• A regressive tax has a tax rate that varies inversely with income
• A proportional income tax requires all taxpayers to pay the same
proportion of their incomes in taxes
• A progressive tax takes a larger share of higher incomes as tax