Lecture: Role of

Government
Chapter 19

Outline

Types of Government Intervention

Types of Goods
Reasons for Public Intervention
Government Failure

Recap
Last time talked about market failure
Markets are problematic in health care
because

1.
2.

Dont provide goods efficiently

Dont provide good equitably

Types of Government
Intervention
Inform: or persuade
consumers/providers/suppliers to act in a
certain way.

1.

Publicize health risks (smoking)

Disseminate information on disease patterns
(swine flu), or risks of medical procedures.

Types of Government
Intervention
2. Regulation: determines how a private

activity may be undertaken.

At extreme govt can prohibit goods or activities.

Setting standards for doctors and drug trails
Regulate insurers to provide certain
interventions.
Includes mandates: obliges someone to do
something, and (usually, though not always) pay
for it.

E.g. employers of a certain size must provide health

insurance, children must be immunized at schools

Types of Government
Intervention
Regulation and mandates appeals to legislators

b/c tackles problems without incurring

government spending.

Affects spending of those that are regulated e.g. two

day hospital days after delivery.

4. Finance: health care with public funds.

Delivery can still be public.

Types of Government
Intervention
5. Provide: or deliver health services using

publicly-owned facilities and civil service

staff.

Usually publicly financed and provided

More typical of developing countries
Developed countries usually provide a lot of
autonomy if publicly provided (crown
corporations).

6. Taxes/subsides on goods e.g. cigarettes

With diabetes increasing so quickly should

certain foods be taxed more?

Types of Goods
Public Goods: 2 qualities

Nonrival: someones consumption does not

reduce the amount available for others to
consume.

Control of disease vectors (malaria)

Food and water safety

Non-excludable consumer cannot be excluded

from consuming the good either by having to pay
or through some other mechanisms.

Classic example national defense.

Types of Goods
Merit Goods: good that are thought to be good
for someone regardless of the persons own
preferences.

Compulsory education.
Wearing seat belts or helmets on motor cycles.
Tobacco and drugs.

Market failure because dont consume

enough of it.

Rational for government

intervention

Governments often try to correct market failures

(market distortions).
Remember the theory of the second best, fixing the
distortion wont necessarily make people better off
(may or may not).

Need to think about when government intervention may be

appropriate.
Can sometimes be a value judgement.

In health care governments are not aiming for

perfect competition because not achievable for
much of health care. Instead use other mechanisms
than a price mechanism to ration health care.

Rational for government

intervention
Public Goods:

1.

Market failure because too little of the good is produced

in private markets.
Usually large number of individuals.
Individuals unlikely to cooperate to fund substantial
amounts of public goods through voluntary
contributions.
Free-riders: cant exclude them from the benefits, but
free-ride b/c an voluntary contribution has a negligible
impact on availability.
Government takes responsibility for providing good.
E.g. control of disease vectors (malaria), clean air, food
and water safety, information, medical research (some
types), information, voluntary giving (redistribution)

Rational for government

intervention
2. Externalities:

Goods that have third-part effects.

When a third party is affected by another

persons consumption or production of a good.
And price mechanisms to compensate these
people.

E.g. neighbors loud music, smoke, air pollution,

contagious diseases (SARs, Bird Flu)

Problem is that externalities are not reflected in

the price of a good.

Factories dont pay extra because they made the air

dirty (hopefully in the future they will).

Rational for government

intervention
Case of immunizations
Price

MSB: Marginal Social Benefit

MC: Marginal Cost = Price

Supply Curve
D: Demand curve or private
marginal benefit curve.
MEB: Marginal external benefit
Qm Qopt

Health Care

Efficient point for society

Rational for government

intervention
Case of immunizations
Price

Policy Response:
Subsidize price of good.

MSB

MC
MC with subsidy
D
MEB
Qm Qopt

Health Care

Rational for government

intervention

Are subsidies to producers passed onto

consumers?

Depends on the slope of the demand and supply

curves.
D

S1
S2 : after subsidy

P1
P2
P1-S
Q
Consumer and producer benefits

Only consumer
benefits

Rational for government

intervention

Policy Options for Externality:

For negative externalities (air pollution, dumping feces into

water supplies)

Subsidy
Regulation and mandates (laws).
Public provision/finance of some goods

immunizations in developing countries have vaccination campaign

days and weeks
disease surveillance

Charitable externality: can be sufficiently important

to justify large social insurance programs.

Rational for government

intervention
3. Incomplete Markets:

E.g. Insurance companies dont want to insure

you for pre-existing diseases (cancer, AIDS).

Cant buy insurance.

Policy Options:

Could use mandates that make insurance

companies cover these people.

May need to subsidize drugs or care.

Could provide care.

Rational for government

intervention
4. Merit Goods

Use argument everyone should have access to

health care.

Why many developing countries have free

access to medical care (even if cant afford to
provide it).

Why you see universal health care systems.

Rational for government

intervention
Market Power

5.

Monopolies, oligopolies etc.

Any industry where the supply or marginal cost curve is
not flat (so are not price takers)

E.g. Hospital, drug companies (patents), specialists,

Often create market power by differentiating products. E.G

specializing in different kinds of operations.

Produce less and charge more than a competitive

market.
Due to economies of scale, production may be more
efficient if you have a monopoly (natural monopoly)

E.g. power sector, hospital, medical research

Rational for government

intervention
Policy options for market power
Regulate

May set maximum prices.

Negotiate prices with drug companies and
doctors.
Mandate longer hospital stays (deliveries, started
to only insure 1 night stays, it was mandated that
woman could stay 2 nights.

Public provision.

Government Involvement in US

Support for hospitals

Started under the Hill Burton Act in 1946

Idea was to expand rural health facilities by providing

matching grants to non-profit institutions.
Requires states to survey its hospital needs and develop
a statewide plan for construction of public hospitals.

State, county and municipal hospitals account for

20 % of total hospital beds.

Government Involvement in US

The Veterans Administration & Champus

Largest public provider of health care in US.

Provide care for veterans
Retired military personal and dependants.

Food and Drug Administration

Started in 1906
Regulates drugs quality.

Government Involvement in US

Mandated Health Insurance Benefits.

Insurance industry is regulated at the state level.

Tradition role is to ensure solvency of insurance
companies.
Mandate insurance benefits.

In 1970, 48 mandates in 1991 1,000, in 1997, 600 new

ones.
Often are due to special interest groups.

Some research has found that they prevent

insurers from offering low-cost alternatives.

Government Involvement in US

Tax Policy

Employer contribution to health insurance not part

of taxable income.
Individual payments for health insurance and care
can be itemized and deducted if amount large
enough.
HAS
These subsidies do not promote equity, go to
those who can afford the most health care.

Government Involvement in US

Public Health

Financing Health Insurance

Department of Public Health

Center for Disease Control
Medicare and Medicaid

Finance Medical Education and Research

Institutes of Health (provides grants)

Government Failure

What is the extent and form of government

involvement?
Hard to agree on objectives, choose from
different policy instruments, and select the
correct value of these instruments.
These difficulties could lead to government
failure.

Government Failure
Economists tend to treat government as a
benevolent despot who knows what is good for the
economy and regulates accordingly
1. Theory of Local Capture:

Some argue that politicians are like everyone else, they

want to maximize how many votes they get.
So instead of doing what is good for the economy, may
do what is good for some special interest group.
May reward voters with monopoly profits, or public goods
(common to build a hospital in your name in developing
countries, beneficial regulation

Government Failure

Consumers could band together to be a

special interest group but tend not to because
difficult to agree on one interest, and due to
free-rider issue.
Criticisms of capture theory

Assumes all public officials are solely selfinterested which is not the case.
Leaves little room for ideology in politics. People
assumed to do what special interest groups want
even if doesnt follow party platform

Government Failure
2. Bureaucracy and efficiency

Government is a monopoly so if tries to provide

goods will it do so at the minimum cost.

Government run by politicians who tend to prefer

quick fixes rather than longer-term solutions.

Some of these criticism could also be made of

the private market.

They do quick fixes when cleaning up environmental

spills.
Not all managers are trying to maximize company
profits, they may be trying to maximize their salaries,
or length of stay in the job.

Government Failure
3. Dont have capacity to administer

Due to low wages may not be able to hire

competent people.

Corruption may be large

More often the case in developing countries.

Role of Public and Private

Sector
No one right way
Depends on level of income of the country

Poor countries cannot afford to provide health

care for all, so tends to be a larger role for the
private sector.

Dont have ability to tax.

Public funds need to be concentrated on the most
cost-effective interventions.

Role of Public and Private

Sector
Rich countries can afford to be more
involved in health care. How much you
governments intervene often depends on
beliefs.

There is a battle over superiority of:

1. Regulation: Increased government
involvement through expanded regulation
and government programs to provide or
finance health care.

Role of Public and Private

Sector

Argue that information imperfections, flawed

agency relationships, and other distortions cannot
be readily corrected by private markets.
The point to the US record with the highest cost of
health care, least regulation, and poor health
outcomes compared to other developed countries
as proof.

Role of Public and Private

Sector
2. Competition: An increased emphasis on

market mechanisms and market forces with

a decreased in use of regulatory
instruments.
Is seen in two ways:
a.
b.

Adhere more of a competitive market.

Rely on financial incentives instead of controls to
achieve goals.