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Chapter 4: Economic Efficiency and Cost Benefit Analysis

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

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Chapter 4: Economic Efficiency and Cost Benefit Analysis

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  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

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