Economics 7550 – Fall 2013 Lecture 2 – A Model of Health Care Production and Policy From Zweifel and Breyer

C HX M C = C(X) C = Home Good H = Health X = Non-medical Good M = Medical Good We buy these! We produce these!

C HX M C = C(X) H = H (M) Y = pX + qM Y(H) = pX + qM C = Home Good H = Health X = Non-medical Good M = Medical Good Why do these look like this? Y1Y1 Y2Y2 Y3Y3 Y0Y0

This leads to a relationship between goods X and M. If we differentiate the function, realizing that H = H(M), we get: This leads to: Y = pX + qM Numerical Example

Normally: This implies that more M  less X. Here, if you buy more M, you’re healthier -- it may allow you to buy more X as well. Then more M  more X If Either equals 0, negative relationship occurs

C HX M C = C(X) H = H (M) Y = pX + qM Y(H) = pX + qM

C HX M C = C(X) H = H (M) Y = pX + qM Y(H) = pX + qM U = U(C, H)

C HX M C = C(X) H = H (M) Y = pX + qM Y(H) = pX + qM U = U(C, H) Q* = qM*/y(H*) = Optimal Health Share X* C* H* M* Q*

Some Macro thoughts We may not know much about H or C, but we can measure [qM] and [pX]. Let H = person-years of good health qM = national health expenditures pX = aggregate consumption expenditures Suppose there’s an improvement in health technology.

C HX M C = C(X) H = H (M) Y(H) = pX + qM U = U(C, H) X* C* H* M* Q* H + = H + (M)

Other types of changes Preferences between health and consumption. C (X) is not constant. Better education, for example, may increase C. Budget constraint is subject to changes in p and in q, as well as to increasing incomes (or wage rates). Institutional factors (e.g. Social Security, Medicare, National Health Insurance) may make a difference.

Ruhm on Macroeconomy and Health In 1970s there was a lot of literature (Brenner, a sociologist, and others) that said Bad economy  bad health They did some time series analysis that purported to show that a bad economy had adverse health impacts. The answer, not surprisingly, is “well, it depends.”

Let’s look at drinking Bad economy  stress ↑  drinking ↑ BUT, bad economy  income   drinking . Drinking   less  drunk driving and fewer deaths from drunk driving.

These should be examined at the individual level I looked at this using a 2001 database.

Income and Alcohol The relationship is complicated.