Chapter 18 Equity, Efficiency, and Need

Key Ideas

 Other than some public finance or public administration courses, the health

economics course is the only place in most economics curricula where instructors

discuss equity.

 Economics can provide useful criteria for society’s efficient allocation of resources

through the concept of Pareto optimality. However, Pareto optimality does not imply

equity. The allocation in which one person has all of the resources, and others have

none is, in fact, a Pareto-optimal allocation.

 Efficiency criteria provide strong support for the imposition of competitive markets,

assuming that the conditions under which competitive markets may emerge will be

present. Economist Thomas Rice argues that many of the necessary conditions do not

hold, and hence competitive markets may not be optimal, or desirable.

 Although Pareto optimal conditions and the resulting contract curves provide a menu

of possible allocations of goods, the decision as to which allocation is preferable for

society is a political one that must be provided by a political process.

Teaching Tips

 The Edgeworth Box analyses presented here relate to any two generic goods. Is health

care comparable to other goods? Why or why not?

 Thomas Rice’s volume, although now somewhat dated, provides useful and non-

technical arguments about the problems of standard economic assumptions to health

economics. Instructors with time for book reviews or discussions may wish to assign

it.

© 2017 Taylor & Francis

 Students may not be familiar with Lorenz curves. One can demonstrate them with

quartiles or quintiles of population and expenditures. Gini coefficients can be

approximated by adding areas of triangles and trapezoids under the curve, and

comparing them to a denominator of 5,000 (i.e., 0.5 × 100 × 100). Instructors may

want to ask students whether standard Lorenz curves can cross (they can!).

 The 2010 passage of the Affordable Care Act (ACA), and the continuing debate

regarding its provisions, constitute ideal opportunities to look at health care equity.

There is considerable discussion in other chapters (particularly Chapter 22) on the Act

and its features. Issues of insurance, coverage, access, and/or utilization, will provide

animated discussions.

 The 2016 US Presidential election featured considerable debate about income

distribution, as well as about “winners” and “losers” from various policies. In short,

distribution matters. Articles from local and national news media can kick off

important discussions about such policies.

© 2017 Taylor & Francis

Chapter 18 Multiple-Choice Questions

1. Equity refers to the _________ of the allocation of goods and services.

a. costs
b. fairness*
c. efficiency
d. benefits

2. Improved economic efficiency:

a. will always lead to more equitable outcomes for all.

b. will never lead to more equitable outcomes for all.*
c. will always provide benefits to the most deserving members of society.
d. could improve the equity of benefits if the gains are appropriately distributed.*

3. Definitions of equity typically refer to allocations of health care ______.

a. inputs.
b. outputs.
c. consumer incomes.
d. Answers (a) and (b) are correct.*

G
Belinda

C
F

Food Contract curve

E

D
A
Abner Medical goods
4. In the figure above, point ___ is an unambiguous improvement from point ___ for
Belinda.

a. F; E
b. B; E*
c. C; D
d. E; B

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5. In the figure above, which points refer to efficient allocations of goods between
Abner and Belinda?

a. A, E, G*
b. C, D, E
c. B, C, F
d. B, D, F

6. In the figure above, point ___ represents a competitive equilibrium. This means that it
is _________.

a. D; equitable
b. B. equitable
c. E; Pareto efficient*
d. C; Pareto efficient

7. Reallocating both food and medical goods away from Abner to Belinda would be
described by a movement from point ______ to point _________:

a. B; C
b. C; B*
c. E; D
d. D; F

8. In the figure above, if one defines equity in terms of the amount of medical goods that
each person has, then moving from point C to point E may _____.

a. increase equity and reduce efficiency

b. decrease equity and decrease efficiency
c. increase equity and increase efficiency
d. decrease equity and increase efficiency*

9. In the figure above, according to the Second Fundamental Theory of Welfare

Economics, competitive markets can be used to move Abner and Belinda from point
B to point E if:

a. Belinda agrees to give Abner some food.

b. Abner agrees to give Belinda some food.
c. some food and medical goods are taxed from Belinda and provided to Abner.*
d. some food and medical goods are provided by the government to Abner.

© 2017 Taylor & Francis

10. Giving a poor person food at half of the market price ___ Pareto optimal because
____.

a. is; the poor increase their welfare.

b. is; rich decrease their welfare.
c. is not; the poor person can sell the subsidized food at the full price and be better
off.*
d. is not; the rich people will not agree to it.

11. Okun’s “leaky bucket” suggests that:

a. redistributing resources may be done in a Pareto-efficient manner.

b. redistributing resources may be done without losing any of the resources.
c. redistributing resources may reduce the total amount of resources available.*
d. Answers (b) and (c) are correct.

12. Okun’s “leaky bucket” suggests that redistributing resources:

a. is a bad idea because those who are providing the resources will stop working.
b. may be a bad idea because those who are providing the resources may reduce
their work effort.*
c. may be a bad idea because the recipients may reduce their work effort.
d. may be a bad idea because the recipients do not value resources that they did not
earn themselves.

13. ________ represent positive external benefits of a program to inoculate the

population against contagious diseases.

a. The salaries paid to the workers

b. The payments to the vaccine manufacturers
c. The reduced probabilities of disease for those who are not inoculated*
d. Answers (a) and (c) are correct.

14. In the presence of external benefits, competitive markets will generally provide:

a. the economically efficient level of output.

b. less than the economically efficient level of output.*
c. more than the economically efficient level of output.
d. The answer depends on the nature of the benefits.

© 2017 Taylor & Francis

15. When there are external costs, competitive markets will generally provide:

a. the economically efficient level of output.

b. less than the economically efficient level of output.
c. more than the economically efficient level of output.*
d. The answer depends on the nature of the benefits.

16. The “welfarist critique”:

a. argues that health care is too expensive for most people.

b. asserts that competitive markets in the health economy may not always work
because the health economy violates many of the assumptions.*
c. argues that redistribution of resources from the rich to the poor will provide a
Pareto-efficient improvement for society.
d. makes the point that one need not worry about fairness in allocating health
resources.

Belinda’s utility

45o

U Albert’s utility

17. In the figure above, curve UU is downward sloping because:

a. there are diminishing marginal returns to person A.

b. there are increasing marginal returns to person B.
c. with Pareto efficient allocations person A’s utility must come at the expense of
person B’s utility.*
d. Answers (b) and (c) are correct.

© 2017 Taylor & Francis

18. In the figure above, point B is on a 45o line. This means that person A and person B:

a. both have the same incomes.

b. both have the same amounts of health care.
c. both have the same utility levels.*
d. Answers (b) and (c) are correct.

19. In the figure above:

a. point C is economically more efficient than point B.

b. point C is more preferable to people like Albert than point B.*
c. any society would be indifferent between points B and C.
d. people like Belinda would be better off at point C than at point B.

20. In the figure above, moving from point B to point C means:

a. reallocating more of at least one good from Belinda to Albert.*

b. reallocating more of at least one good from Albert to Belinda.
c. there will be a more equitable society.
d. that Belinda will stop working.

21. The Theorem of the Second Best implies that:

a. policies that promote competition improve economic welfare.

b. because there are multiple market imperfections we cannot always be sure that
policies that promote competition will improve economic welfare.*
c. because there are multiple market imperfections, policies that promote
competition will never improve economic welfare.
d. equity is a better target for economic policies than is efficiency.

22. The Theorem of the Second Best implies that because of multiple market
imperfections:

a. we should not engage in income or wealth redistribution.

b. competitive market interventions will necessarily make someone worse off.
c. competitive market interventions may lead to increased efficiency.*
d. Answers (a) and (c) are correct.

23. The “Fair Innings Proposal” would seem to imply (with respect to an organ
transplant) that:

a. it is impossible to determine to whom a scarce health resource should be given.

b. we should use the market to determine who should get scarce organs.
c. older people should be given preference because they have lived more “innings.”
d. younger people should be given preference because they have more “innings” to
live.*

© 2017 Taylor & Francis

24. According to the Theorem of the Second Best, easing medical licensure laws:

a. will improve societal well-being because we have greater freedom of choice.

b. will improve societal well-being because the increased competition will lower
prices.
c. may not improve societal well-being because of increased pollution.
d. may not improve societal well-being because services of inferior quality may be
produced by less qualified providers.*

1.0

Cumulative proportion A
of standardized B
expenditures 0.5
0.5
C

0 0.5 1.0

Cumulative proportion of population ranked by income

25. In the figure above, curve _______ represents the most even distribution of health
care spending.

a. A
b. B*
c. C
d. D

26. In the figure above, curve ______ represents a distribution in which spending favors
the poor.

a. A*
b. B
c. C
d. D

© 2017 Taylor & Francis

27. The analysis of van Doorslaer and colleagues (Table 18.1 in the textbook) finds that
across countries general practitioner care ____ and specialty care ________.

a. favors the poor; favors the rich*

b. favors the poor; also favors the poor
c. favors the rich; favors the poor
d. favors the rich; also favors the rich

28. In the analysis of van Doorslaer and colleagues (Table 18.1 in the textbook), a
positive value means that:

a. those at higher income levels are “advantaged.”

b. those at higher income levels are “disadvantaged.”
c. those at lower income levels are “disadvantaged.”
d. Answers (a) and (c) are correct.*

29. In the analysis of van Doorslaer and colleagues (Table 18.1 in the textbook), the poor
are better off in all measures in:

a. Ireland.
b. Germany.
c. Luxembourg.*
d. Answers (a) and (b) are correct.

30. Under the “maximin” principle, a society would be best off if it:

a. allocated resources to the most productive members.

b. allocated resources to the least productive members.
c. maximized the position of those who were in the best circumstances.
d. maximized the position of the worst off.*

31. In speaking of the “bottomless pit,” analysts worry that:

a. allocating a society’s resources to equalize patient outcomes could exhaust the

resources.*
b. allocating a society’s resources to the poor could cause the rich to stop working.
c. spending resources on additional care does not increase patients’ health.
d. Answers (b) and (c) are correct.

© 2017 Taylor & Francis

32. Seeking _____ is most likely to lead to a “bottomless pit” with respect to health care
resources.

a. equality of access
b. equality of utilization
c. equality of outcome*
d. Answers (a) and (c) are correct.

33. According to utilitarians, society’s welfare is maximized by:

a. allocating resources to the poorest members of the population.

b. continually reallocating resources to those with the lowest marginal utilities,
hence maximizing total utility.
c. continually reallocating resources to those with the highest marginal utilities,
hence maximizing total utility.*
d. Answers (a) and (b) are correct.

34. According to utilitarians, society’s welfare is maximized when:

a. everyone has the same marginal utility.*

b. everyone has the same total utility.
c. the poorest have high marginal utility.
d. Answers (a) and (b) are correct.

35. If everyone has the same utility function, then according to utilitarians, society’s
welfare is maximized when:

a. everyone has the same marginal utility.

b. everyone has the same total utility.
c. everyone has the same income.
d. Answers (a), (b), and (c) are correct.*

© 2017 Taylor & Francis