Affordable Care Act: Govt. Intervention in Health Insurance & Economic Impact - Prof. Farr, Apuntes de Economía del Sector Público

¡Descarga Affordable Care Act: Govt. Intervention in Health Insurance & Economic Impact - Prof. Farr y más Apuntes en PDF de Economía del Sector Público solo en Docsity! Introduction to Public Policies Master en Economía, Regulación y Competencia en los Servicios Públicos Lídia Farré, Ph.D. 1.1 Why study public economics? • 1. The Four Questions of Public Finance • 2. Why Study Public Finance? Facts on Government in the United States and Around the World • 3. Why Study Public Finance Now? Policy Debates over Social Security, Health Care, and Education • 4. Conclusion The four questions of public finance • Public finance: The study of the role of the government in the economy. • Four questions of public finance: 1. When should the government intervene in the economy? 2. How might the government intervene? 3. What is the effect of those interventions on economic outcomes? 4. Why do governments choose to intervene in the way that they do? When Should the Government Intervene in the Economy? • Economics generally presumes that markets deliver efficient outcomes, so why should government do anything? • Primary motive for government intervention is therefore market failure. • Market failure: A problem that causes the market economy to deliver an outcome that does not maximize efficiency APPLICATION: Modern Measles Epidemic • Measles vaccine was introduced in 1963, and measles cases had become relatively rare in the United States by the 1980s. • 1989−1991: Huge resurgence in measles. • This outbreak resulted from very low immunization rates among disadvantaged inner-city youths. • Unimmunized children imposed a negative externality on other children. When Should the Government Intervene in the Economy? • Even if the market is well-functioning, an efficient outcome is not necessarily socially desirable. • Redistribution is a second reason for government intervention. • Redistribution: The shifting of resources from some groups in society to others. How Might the Government Intervene? • Tax or Subsidize Private Sale or Purchase o Use the price mechanism, changing the price of a good to encourage or discourage use. • Taxes raise the price for private sales or purchases of goods that are overproduced. • Subsidies lower the price for private sales or purchases of goods that are underproduced. How Might the Government Intervene? • Restrict or Mandate Private Sale or Purchase o Quotas restrict private sale of goods that are overproduced. o Mandates require private purchase of goods that are underproduced. • Public Provision o The government can provide the good directly. • Public Financing of Private Provision o Governments pays; private companies produce. The government is a huge part of the economy: • Government spending represents a large sector of the economy, in the United States and around the world. • This spending is financed with taxes or with debt, and these affect every facet of the economy. • Many sectors of the economy are also directly affected by regulation. Why Study Public Finance? • The methods and results derived from empirical economics are central to the development of public policy at all levels of government. • The Congressional Budget Office (CBO) “scores” policy proposals by estimating their budget implications. • CBO scoring uses the theoretical and empirical tools of public finance. • CBO scores can determine the fate of legislation. APPLICATION: The CBO: Government Scorekeepers The Size and Growth of Government: Federal Spending as a Percent of GDP, 1930−2014 In 1930, the federal government’s activity accounted for only about 3.4% of GDP. From the 1950s through the present, the size of government has averaged around 20% of GDP, although it grows during recessions. Federal vs. State/Local Government Spending, 2014 The federal government provides the majority of government spending in the United States, but other government spending is quite large as well, amounting to roughly one-third of total government spending, and over 110% of GDP. Spending, Taxes, Deficits, and Debts Government spending and its inflows are tax revenues. • If revenues exceed spending, there is a budget surplus. • If revenues fall short of spending, there is a budget deficit. • Each dollar of government deficit adds to the stock of government debt. That is, the deficit measures the year-to-year shortfall of revenues relative to spending. • The debt measures the accumulation of past deficits over time. • This government debt must be financed by borrowing from either citizens of one’s own local or national area, or by borrowing from citizens of other areas or other nations. Spending, Taxes, Deficits, and Debts: Federal Revenues and Expenditures, 1930−2014 With the exception of an enormous increase in spending unmatched by increased taxation during World War II (1941–1945), the federal government’s budget was close to balanced until the late 1960s. Spending, Taxes, Deficits, and Debts: Debt Level of OECD Nations in 2014 The United States has higher debt levels than most other comparable nations, but its load remains well below others. Spending, Taxes, Deficits, and Debts: State and Local Government Receipts, Expenditures, and Surplus, 1947−2014 Unlike the federal government, state and local government’s budgets are typically in surplus: there is very little deficit overall across the state and local governments in any year. Distribution of Spending • Public goods: Goods for which the investment of any one individual benefits everyone in a larger group, discussed in Chapter 9. o Example: Defense spending • Social insurance programs: Government provision of insurance against adverse events to address failures in the private insurance market, discussed in Chapter 13. o Example: Health insurance • Over time, spending has shifted dramatically toward social insurance, especially health insurance. Distribution of Revenue Sources • Individual income tax: A tax levied on the income of U.S. residents. • Corporate tax revenues: The funds raised by taxing the incomes of businesses in the United States. • Payroll taxes: The taxes on worker earnings that fund social insurance programs. The major shift over time at the federal level has been the rapid shrinking of corporate tax revenues. The decrease in revenue from these taxes has been largely replaced by the growth of revenue from payroll taxes. Distribution of Federal Revenue Sources, 1960 and 2014 Corporate tax revenues once provided almost 25% of federal government revenue, they now provide only about 15%. Payroll taxes have grown from a sixth of federal revenues to well over a third. Distribution of State/Local Revenue Sources, 1960 and 2014 Over the past 40 years, the substantial drop in revenue from property taxes has been made up by rising federal grants and income taxes. Social Security is the single largest government expenditure program. • The financing structure of this program is basically that today’s young workers pay the retirement benefits of today’s old. • As the population ages, it is increasingly difficult to fund. • Liberals argue that we should raise necessary resources through higher payroll taxes. • Conservatives argue that, rather than transfer from young to old, we should encourage people to save. Why Study Public Finance Now? Social Security • By 2010, about 50 million Americans lacked any health insurance, about 18% of the non-elderly U.S. population. • The Affordable Care Act (ACA) expanded the government’s role by increasing regulation of insurance markets, mandating insurance coverage, and introducing large new subsidies for the purchase of health insurance, discussed in Chapter 16. o Supporters argue that the ACA corrects serious market in the insurance market. o Opponents charge that it represents an enormous, expensive, unwarranted expansion of government power. Why Study Public Finance Now? Health Care •There is an enormous dissatisfaction with our current educational system. • In 2012, the United States ranked 17th in reading, 20th in science, and 27th in math skills in a study of 65 countries. • Will more spending improve educational outcomes? • Or might competition among schools help? Why Study Public Finance Now? Education 1.2 Theoretical tools to study public economics • Theoretical tools: The set of tools designed to understand the mechanics behind economic decision making. • Empirical tools: The set of tools designed to analyze data and answer questions raised by theoretical analysis. How consumers make choices? We can illustrate how consumers are presumed to make choices in four steps: 1. First, we discuss how to model preferences graphically. 2. Then, we show how to take this graphical model of preferences and represent it mathematically with a utility function. 3. Next, we model the budget constraints that individuals face. 4. Finally, we show how individuals maximize their utility (make themselves as well off as possible) given their budget constraints. Constrained utility maximization • Utility function: A mathematical function representing an individual’s set of preferences, which translates her well-being from different consumption bundles into units that can be compared in order to determine choice. • Constrained utility maximization: The process of maximizing the well-being (utility) of an individual, subject to her resources (budget constraint). • Models: Mathematical or graphical representations of reality. Preferences and Indiference Curves • Consumer is indifferent between A and B. • C is preferred to A or B. Utility mapping of preferences Underlying the indifference curves is an individual's utility function. A utility function is some mathematical representation, U = f(X,,X2,Xz3, ...) X1, X2, X3, and so on are the quantities of the goods consumed. f is some mathematical function that describes how consumption of each good translates to utility. Utility mapping of preferences: Example * Example utility function: Andrea's utility for CDs (Q.¿) and Movies (Q yy) is: U(Qc,Qm) = Oc X Qu » Andrea is indifferent between 4 CDs and 1 movie, or 1 CD and 4 movies. U(Q. Qu) = v4x1=2 or U(Q., Qm) = v1x4=2 * Andrea prefers 3 CDs and 3 movies to either bundle. U(Q. Qu) = v3 Xx =3 Marginal rate of substitution » Marginal rate of substitution (MRS): The rate at which a consumer is willing to trade one good for another. * Moving along an indifference curve keeps a consumer equally well off, so + The MRS is equal to the slope of the indifference curve, the rate at which the consumer will trade the good on the vertical axis for the good on the horizontal axis. MRS = —MUy/MU¿ Marginal rate of substitution As Andrea moves down the indifference curve, getting more movies and fewer cakes, the marginal utility of cakes rises, and the marginal utility of movies falls, lowering the MRS. Budget constraint Budget constraint: A mathematical representation of all the combinations of goods an individual can afford to buy if she spends her entire income. Y = PcQc + PmOm Opportunity cost: The cost of any purchase is the next best alternative use of that money, or the forgone opportunity. Quick hint: When a person's budget is fixed, if he buys one thing he is, by definition, reducing the money he has to spend on other things. Indirectly, this purchase has the same effect as a direct good-for-good trade. Putting all together: constrained choice * To maximize utility, therefore: "Or, find tangency between indifference curves and budget constraint. Putting all together: constrained choice Whenever a consumer is at a point where the indifference curve and the budget constraint are not tangent, she can make herself better off by moving to a point of tangency. The Effects of Price Changes: Substitution and Income Effects • Maximizing utility tells us how many goods a person buys at a given price. • What happens when we change the prices? • Substitution effect: Holding utility constant, a relative rise in the price of a good will always cause an individual to choose less of that good. • Income effect: A rise in the price of a good will typically cause an individual to choose less of all goods because her income can purchase less than before. Equilibrium and Social Welfare How do markets determine what gets produced? Do they produce the right amount? • Market: The arena in which demanders and suppliers interact. • Market equilibrium: The combination of price and quantity that satisfies both demand and supply, determined by the interaction of the supply and demand curves. • Welfare economics: The study of the determinants of well- being, or welfare, in society. Demand Curves How much of a good do people want to buy at the market price? • Demand curve: A curve showing the quantity of a good demanded by individuals at each price. • Obtained by finding the utility-maximizing bundle at each price. Demand Curves The relationship between the price and utility maximizing choices can be used to trace out the demand curve for movies, DM. Elasticity of demand • Perfectly inelastic and perfectly elastic demand: • When the elasticity of demand is zero, the demand curve is perfectly inelastic, in which case o the demand curve is vertical, and quantity demand does not change when price rises. • When the elasticity of demand is infinite, the demand curve is perfectly elastic, in which case o the demand curve is horizontal, and quantity demanded changes infinitely for even a very small change in price. Supply curves How much do firms want to sell or produce at each price? + Supply curve: A curve showing the quantity of a good that firms are willing to produce (supply) at each price. + Supply curves are the outcome of profit maximization by firms. * Firms produce output using a production, such as q=wvKxL. Profit maximization • How do firms decide how much to produce? • Marginal productivity: The impact of a unit change in any input, holding other inputs constant, on the firm’s output. • Marginal cost: The incremental cost to a firm of producing one more unit of a good. • Firms choose quantities to maximize profits, the difference between revenues and costs. • Profit is maximized when market price equals marginal cost. Social Efficiency • Social efficiency represents the net gains to society from all trades that are made in a market, and it consists of the sum of two components: consumer and producer surplus. Also called total social surplus. • Consumer surplus: The benefit that consumers derive from consuming a good, above and beyond the price they paid for the good. • Producer surplus: The benefit that producers derive from selling a good, above and beyond the cost of producing that good. Consumer surplus: graphical representation Consumer surplus is the area under the demand curve and above equilibrium price. Demand = willingness to pay. Producer surplus: graphical representation Producer surplus is the area above the supply curve and below equilibrium price. Supply = marginal cost. Competitive Equilibrium Maximizes Social Efficiency • First Fundamental Theorem of Welfare Economics: The competitive equilibrium, where supply equals demand, maximizes social efficiency. • Deadweight loss: The reduction in social efficiency from preventing trades for which benefits exceed costs. • Quick hint: Deadweight loss is a triangle that points toward the equilibrium price and grows away from it. From Social Efficiency to Social Welfare: The Role of Equity • Second Fundamental Theorem of Welfare Economics: Society can attain any efficient outcome by suitably redistributing resources among individuals and then allowing them to freely trade. o Difficult in practice to redistribute like this. • Social welfare: The level of well-being in society. o Determined by both how much gets produced and how it is distributed. • Equity–efficiency trade-off: The choice society must make between the total size of the economic pie and its distribution among individuals. Social Welfare Functions * Social Welfare Function (SWF): A function that combines the utility functions of all individuals into an overall social utility function. * The utilitarian social welfare function maximizes the sum of individual utility: SWF" =U, + U)+-*+Uy + The Rawlsian social welfare function maximizes the utility of the worst-off member of society: SWF* = min(U,,U»,..., Uy) Putting the Tools to Work: TANF and Labor Supply Among Single Mothers: Identifying the Budget Constraint If she takes no leisure, she can have consumption of $20,000 per year; but if she takes 2,000 hours of leisure, her consumption falls to 0. This is represented by the budget constraint with a slope of –10, the relative price of leisure in terms of food consumption. Putting the Tools to Work: TANF and Labor Supply Among Single Mothers: Identifying the Budget Constraint Point D marks the end of the new budget constraint and provides a new option: she can have 2,000 hours of leisure and $5,000 in food consumption because of the $5,000 TANF benefit guarantee. Putting the Tools to Work: TANF and Labor Supply Among Single Mothers: Effects of Changes in Benefit Guarantee Food consumption (dollars) $20,000 2,000 Leisure (hours) A B C Slope = −10 Slope = −5 10,000 5,000 1,000 D F E6,000 3,000 1,400 If the guarantee falls to $3,000, the budget constraint (AEF) doesn’t flatten until she takes more than 1,400 hours of leisure; now, with 2,000 hours of leisure, her consumption is only $3,000 at point F. When the TANF guarantee is $5,000, the optimal choice is to take 1,910 hours of leisure and consume $5,450 (at point A). When the guarantee falls to $3,000, she reduces her leisure to 1,655 hours, and her consumption falls to $4,725 (at point B). How Large Will the Labor Supply Response Be? Food consumption (dollars) $20,000 2,000 Leisure (hours) 10,000 5,000 1,000 6,000 3,000 1,400 How Large Will the Labor Supply Response Be? B A (2,000 hours, $5,000) (2,000 hours, $3,000) Because leisure is valued more highly relative to consumption for this individual, she chooses 2,000 hours of leisure regardless of the TANF guarantee. The reduction in guarantee therefore lowers her consumption from $5,000 (at point A) to $3,000 (at point B). Welfare Implications of Benefit Reductions: The TANF Example Continued: Efficiency Effects on efficiency: • Without TANF, the labor market is in competitive. • When TANF is introduced, labor supply falls, which creates a deadweight loss. • When TANF benefits are reduced, supply increases and social efficiency rises. • This chapter has shown both the power and the limitations of the theoretical tools of economics. • Using theoretical tools, we are able to address complicated questions such as how TANF benefits affect the labor supply of single mothers, and the implications of that response for social welfare. • On the other hand, we have been very imprecise about the potential size of the changes that occur in response to changes in TANF benefits. Conclusions 1.3 Empirical tools to study public economics • 1 The Important Distinction Between Correlation and Causality • 2 Measuring Causation with Data We’d Like to Have: Randomized Trials • 3 Estimating Causation with Data We Actually Get: Observational Data Empirical Tools of Public Finance • Empirical public finance: The use of data and statistical methods to measure the impact of government policy on individuals and markets. • Distinguishing between correlations and causal relationship is the key task in empirical public finance. • Correlated: Two economic variables are correlated if they move together. • Causal: Two economic variables are causally related if the movement of one causes movement of the other. Example Identification Problem: SAT Prep Courses Among Harvard students who took an SAT prep course, SAT scores were 63 points lower than among those who hadn’t. • Do prep courses reduce scores (i.e., A causes B)? • Do low scores cause people to enroll in prep courses (i.e., B causes A)? • Does some third factor cause both low scores and enrollment? Randomized Trials as a Solution Randomized trials solve the identification problem. • Randomized trial: The ideal type of experiment designed to test causality, whereby a group of individuals is randomly divided into a treatment group, which receives the treatment of interest, and a control group, which does not. • Treatment group: The set of individuals who are subject to an intervention being studied. • Control group: The set of individuals comparable to the treatment group who are not subject to the intervention being studied. Randomized Trials as a Solution Why do randomized trials solve the problem? • Random assignment rules out reverse causation. • Random assignment means the treatment and control group differ only by treatment. This rules out any third factors causing both treatment and effects. • Any difference between treatment and control group must be due to treatment. • Randomized trials therefore considered the “gold standard” for determining causality.