Class 5: Maximizing society’s sense of well being Economic theory models social behavior that achieves Pareto Optimum The key question: Is the social construct we call ‘Free Market Competition’ the best approach for achieving Pareto Optimum in the Medical Care Industry?

Kenneth Arrow Nobel Prize Recipient in Economics Arrow’s 1963 article “Uncertainty and the Welfare Economics of Medical Care” created the field of health economics. Three concepts presented in this article: –The nonmarketability of bearing suitable risks and imperfect marketability of information. –Survey of special characteristics of the medical care market. –Uncertainty and the Theory of Ideal Insurance.

The study of Economics: Is a social science Is focused on so-called rational choices individuals and groups make regarding their well being Makes the assumption that the resources a society holds are limited while its needs are unlimited Has the goal of helping social groups use limited resources in ways that achieve the greatest possible sense of well being

Economic thinking is built around three key questions: What products or services to produce? How to produce these products or services? For whom are these products and services produced?

As a social science Economics started by measuring social welfare and progressed by theorizing how a society might maximize its social welfare In the early 20 th century, concepts leading to a construct called Pareto- optimality became the accepted model that economist used when theorizing about social welfare The single elegant condition for achieving Pareto optimal was: That balance where someone’s well being could not increased without decreasing another’s.

A 5-step progression from individual consumers to an entire society’s welfare Consumer behavior Production behavior A depiction of the whole society Reducing the whole society into an ‘Edgeworth Box’ Comparing a point on Edgeworth’s contract curve to maximizing a social welfare function