1 / 10

Chapter 4: Economic Efficiency and Cost Benefit Analysis

Chapter 4: Economic Efficiency and Cost Benefit Analysis. Economic Efficiency Cost Benefit Analysis. Economic Efficiency.

duyen
Download Presentation

Chapter 4: Economic Efficiency and Cost Benefit Analysis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 4: Economic Efficiency and Cost Benefit Analysis Economic Efficiency Cost Benefit Analysis

  2. Economic Efficiency • Economic efficiency requires the maximization of total welfare, with the optimum quantity reflecting the sum of consumers’ and producers’ surplus.1. Consumer surplus (see Figure 4.1)2. Producer surplus (see Figure 4.2) • Figure 4.3 shows that the sum of surpluses (total welfare) is maximized at Q1 where demand equal supply • Example: inefficient (monopolist: too fee goods; polluters: too many goods)

  3. Cost-Benefit Analysis :Background • US Army Corps of engineersCongressional subcommittee (1950)The introduction of Medicare and Medicaid (1965)All federal regulation (1981) • Limitation: all shown in monetary term • Alternatives to CBA1.Cost-Efficiency Analysis (CEA): a way to quantify trade-offs between resources used and health outcomes achievement without having to value health outcomes in monetary terms2.Cost-Utility Analysis (CUA)-a special case of CEA with reflecting individual preference

  4. Cost-Benefit analysis: Basic Principle • CBA involves evaluation projects without decisions made in the market place • Project accepted if B>C • Best projects: B/C ratio ranked • Measuring cost-opportunity cost • Benefit- externality (e.g. flu immunization)

  5. Is equalizing risks program best?Viscusi (2000): no. • Marginal Analysis in CBA (Figure 4-4):Maximize Society’s net benefit=> Marginal Social benefit =Marginal social costs • The cost of saving lives [costs-Resources saving]: childhood immunization and prenatal care have negative net costs • Discounting: multi-periods projects Present value equation (4.1)Q1: should those living in the present so disregard future generation? Q2: market rate of interest rate=social discount rate? Q3: Inequalities in discounting rate?

  6. Risk adjustment: high risk=high interest rateStiglizt (1988): certainty equivalent (more risk=lower certainty equivalent) • Distributional Adjustment: stiglizt proposes more distributional weights to lower income group • Inflation: measure in real term

  7. Valuing Human life • Human capital approach: present value of future earnings • (1)Willingness to accept: labor economy of compensating differentials(2)Willingness to pay: consumer purchasing behavior for risk-reducing devices

  8. Cost-Effectiveness Analysis • CEA ration (4.2)=C1-C0/E1-E0 where cost as usual in dollar and output in health status measurement • Advantage: benefit measurement in non-monetary term

  9. Cost-utility Analysis • Quality-Adjusted Life Years (QALY) (4.3) where quality weight (q) denotes range from 1 (perfect health ) to 0 (death) =>individuals’ preference for health F is the probability of survival; d is discount rate

  10. The Ageism Critique of QALYs • Q: Is it fair for the elderly using QALY? • DALY: human tend to be depend on the middle age groups=> a “hump” shaped set of weights favoring the age groups in the middle

More Related