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Lecture 7

ECON 30801 Lecture Notes - Lecture 7: Sunk Costs, Mosquito Net, Marginal Utility

Course Code
ECON 30801

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I. Healthcare for the poor
A. The benefit outweighs costs for many health products, yet demand low
1. High price elasticity; demand sensitive to small price changes
2. The poor care about their health: spend about 5% of budget on it
a) Spending on remedial care instead of preventative care
B. Designing policy
1. Should we provide subsidies → yes!
a) Pigovian externalities → health benefits spill over
b) If you are healthier, people around you are also going to be
healthier, but individuals don't take this into account when making
their own decisions
c) Social benefits
2. What level of subsidies? → HIGH
a) Free may not get products into the “right” hands
b) People don’t use free things → sunk cost fallacy
(1) Not a lot of weight in this
c) Don’t want to show up in a place without malaria and give them
bed nets
3. Short-run subsidies or long-run? → Short-run
a) Very long lasting effects, even for short run subsidies
b) Taking the subsidy away
(1) Negative effects → reference dependence - you have
gotten used to the subsidized price, then it gets taken
away, and people think it is “too expensive”
(2) Positive effects → learning about the benefits of
healthcare/health products
C. Pigovian externalities in health
1. You are more likely to get worms, malaria, etc., if the people around you
have it
a) This is a scientific statement, not an economic one
2. Preventative health products are a social good
a) There are reasons why people should get healthcare that have
nothing to do with their own benefit
b) Worms example
3. Pigovian externality: when a market activity generates a positive effect not
internalized in the marketplace
a) Policy implication: subsidize the demand
b) Works the opposite way for things that generate a negative effect
→ Ex. - tax businesses that are producing more pollution than
what is beneficial to the society as a whole
4. Example: individual deciding to buy a bed net
a) Private marginal benefit = marginal cost
b) As a government, social marginal benefit = marginal cost
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