Slides for Class 6: Promoting a better grasp of Pareto Optimality and its

application to Health Policy

What happens in markets for medical care when:

There are positive and negative externalities linked to consumption;

When consumers’ tastes for health are not predetermined.

How a Society , Abiding by the Assumptions That Underlie Free Market Competition,

Reaches Pareto Optimality.

• The society consists of 2 households each owning finite amounts of 2 resources - X and Y, and 1 producer that makes and sells 2 services - A and B to the households.

• Acting as consumers, both households optimize their utility when their marginal rate of substitution of A for B = Pa/Pba/Pb

• The producers maximizes profits when it produces where its The producers maximizes profits when it produces where its marginal marginal rate of technical substitution of X for Y = Px/Pyrate of technical substitution of X for Y = Px/Py and, its and, its marginal cost of producing an additional unit of both A and B marginal cost of producing an additional unit of both A and B is = to the market price or A and B.is = to the market price or A and B.

• The society maximizes its collective well-being when The society maximizes its collective well-being when the marginal the marginal rate of transformation of A for B is equal to the Pa/Pb.rate of transformation of A for B is equal to the Pa/Pb.

• The Edgeworth box illustrates how the resources X and Y are allocated The Edgeworth box illustrates how the resources X and Y are allocated between A and B and these services are distributed between the 2 between A and B and these services are distributed between the 2 households. households.

• Note the difference between this society’s contract curve and Note the difference between this society’s contract curve and the point on that curve where social welfare in that society is the point on that curve where social welfare in that society is at a maximum. at a maximum.

Critiquing Assumptions Associated With the Textbook Model of Market

Competition

• Assumption 1: There are no negative externalities

• Assumption 2: There are no positive externalities

• Assumption 3: Consumer tastes are predetermined

Implications for Health Policy

• Equalizing Access to Health Services

• What comes first, allocation or distribution?

• Competition and prevention

• Government sponsored Health education

• Should cost control be a Public policy?

How would you like skill group organized and managed?

• How will the group govern its effort?• How will it structure its work? By tasks? By organizations

involved? By experience with the skill area? Others?• Are there special needs or boundaries within which

members should work? How might the group manage these challenges?.

• What strategies will be used to gather bibliography from journals, books and the Internet?

• Use these questions if you choose to write class 7, 1-pager on this topic.