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Kenneth Arrow Uncertainty and the Welfare Economics of Medical Care

Kenneth Arrow Uncertainty and the Welfare Economics of Medical Care. HSPM 714 J50 Fall 2013. Arrow won his Nobel for laying out in mathematical terms the necessary prerequisites for a free market to have optimal outcomes. This is what "welfare economics" in the title means.

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Kenneth Arrow Uncertainty and the Welfare Economics of Medical Care

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  1. Kenneth ArrowUncertainty and the Welfare Economics of Medical Care HSPM 714 J50 Fall 2013

  2. Arrow won his Nobel for laying out in mathematical terms the necessary prerequisites for a free market to have optimal outcomes. • This is what "welfare economics" in the title means.

  3. Free market optimality requires • Buyers and sellers understand the qualities and prices of all goods or services. • Anything that affects “welfare” is available for sale. • There are so many potential buyers and sellers that none individually can affect the price of the thing being traded.

  4. Free market optimality requires • Consumer sovereignty • Buyers and sellers understand the qualities and prices of all goods or services. • Anything that affects “welfare” is available for sale. • Perfect competition • There are so many potential buyers and sellers that none individually can affect the price of the thing being traded.

  5. First optimality theorem • If we have consumer sovereignty and perfect competition, then • The market will reach a general equilibrium of supply and demand in all markets, such that • No reallocation could make someone happier without making someone else less happy. • “Pareto optimality” or “Pareto efficiency”

  6. Second optimality theorem • Context: • There are many possible optimalities • The distribution of wealth determines which optimality we get • If we don’t like what people are getting from the economy, we can fix that by redistributing wealth and letting the market go.

  7. Problems with optimality requirements • Consumer sovereignty • Buyers and sellers understand the qualities and prices of all goods or services. • Can’t apply if you are buying information • You, the consumer, can't evaluate the advice that the doctor gives you. • Anything that affects “welfare” is available for sale. • A free market can’t offer insurance against having a risk.

  8. Insurance undermines optimality • Insurancemust be offered (marketability) • But undermines incentive • Insurance against having a risk can’t be offered • Efficiency argument • Different from saying it’s unfair? • Assumes: Bad happenstance isn’t bad if you can buy insurance against it

  9. Informed consumer choice isn’t possible • How does society respond? • Professionalism • Wear a tie, or scrubs • No crass business practices • Trust • Agent • Patient is Principal • Doctor is Agent (fiduciary – not quite)

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