Economics of Public Issues 19th

Edition Miller Solutions Manual

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Chapter 9
Kidneys for Sale
 Chapter Overview
Thousands of Americans die each year waiting for an organ transplant because, since 1984, it has been
against federal law to pay for human organs. At least one purported rationale for this legal prohibition is
that it reduces the possibility of “involuntary” donations perpetrated by those who would steal an organ
from donor A to profit financially by its sale to recipient B. But advances in tissue-typing (including
DNA identification) mean that the exact identity of a donor can be quickly established; hence, the
continuation of the payment prohibition cannot be justified on the grounds of preventing involuntary
donations. In fact, it appears that permitting payment for organs would almost surely yield benefits that
substantially exceed the costs.

 Descriptive Analysis

The prohibition on payments for organs acts like a price control on them in which the controlled price is
zero; that is, PC  0, as shown in Figure 9-1. The equilibrium price in a free market would be P* and the
equilibrium quantity would be Q*. Instead, we end up with only QS organs donated at a price of 0, and a
waiting list that reflects both this low donation rate and the large number of organs that are demanded at
this price (QD).

Figure 9-1 A Prohibition on Payment for Organs

Suppose we allow the price of organs to be market-determined. If all of the resulting donations are in fact
voluntary (which modern tissue-typing almost surely guarantees), then the potential gains to society are at

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 Chapter 9: Kidneys for Sale

least as large as the area CEQS, i.e., the area between the demand and supply curve over the range from
QS to Q*. We say “at least” for two reasons. First, there is no guarantee that rationed organs will go to
their highest valued use under the current prohibition, implying that the likely gains from trade under the
current system are smaller than ACQS0. Second, the diagram does not reflect the fact that under the
current system considerable real resources are expended to allocate QS among the QD demanders,
resources that would be saved if payment were permitted.

 Chapter Answers
1. Dividing $3.5 billion by 5,000 yields $700,000 per life saved, an amount well below the value
that people in America seem to place on their own lives. Keeping these people off dialysis for
three years would save (3)($80,000) = $240,000 per person, so we would need to value each life
saved at only $700,000 - $240,000 = $460,000 for the system to effectively pay for itself in
economic terms.

2. Presumably, people will be willing to offer them at lower prices where per capita income is
lowest, but arbitrage between high and low income areas should drive the price to equality across
the country. Whether low-income areas end up actually end up exporting to high-income areas
depends on the variation in demand conditions across areas. Type-2 diabetes is the most
important source of demand for transplant kidneys, and this type of diabetes tends to be higher
where per capita income is lower. Hence it is possible that fewer organs would actually end up
being transported around the country.

3. The prohibition on payment is similar to a collusive agreement among insurers that reduces the
price of this input to the transplant production process. Hence it has the potential to raise insurers’
profits. But it is unlikely that the wealth-maximizing price is zero, as effectively results from an
outright prohibition of trade. The prohibition thus creates a trade-off for the insurers:
Expenditures for the organs are lower, but (i) the insurance is now less attractive to consumers
and (ii) other health expenses (such as for dialysis) may now be higher. The greater the share of
these other costs that are covered by public plans (such as Medicare or Medicaid), the more
attractive for insurers will be the prohibition on payment. For potential transplants paid for by
taxpayers, it seems unlikely that dialysis and other costs can be shunted off onto private insurers,
so on this account taxpayers would be less inclined to favor prohibition. (There are a host of other
considerations, however. For example, if the controlled price PC  0 for organs is very far from
the private insurer optimum, it is possible that private insurers would oppose a prohibition even if
they could shift all of the added dialysis and other costs onto the private sector. And the taxpayer
calculus is affected by the fact that the public payment system generally will induce large wealth
transfers, so that voting on the prohibition is unlikely to be driven solely (or even chiefly) by
considerations of total costs or efficiency.)

4. Yes. The current system tends to allocate donated organs to recipients who live in or can quickly
(within a few hours) get to the specific geographic region where an organ is donated. Large
metropolitan areas have the most experienced transplant teams and tend to get the longest lists of
people who want organs, relative to the number of people who are donating them. Thus, people
living in such areas are more likely to die for lack of an organ than are people living in rural
areas. (This statement ignores the fact that more-experienced transplant teams tend to have a
higher success rate for transplants that do take place.) Thus, a payment system would tend to
reallocate organs from rural to urban areas, benefiting urban dwellers at the expense of people
living in rural areas.

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 Chapter 9: Kidneys for Sale

5. Ignoring the interest rate, shortening dialysis time saves insurers (3 years)  ($80,000/year) 
$240,000 per patient. Hence, if the number of transplants remained unchanged, any organ price
less than about $240,000 would be breakeven for insurers. (Actually, because the interest rate is
positive, the organs would have to be paid for immediately, and the dialysis savings are deferred,
the breakeven price would be somewhat lower than $240,000.) But, as noted in the text, if we
permit payment for organs, more will be forthcoming, implying more transplants and hence
additional (insured) costs associated with those transplants. Because the non-organ costs of a
transplant (surgical fee, operating room, hospital stay, etc.) are substantial, the net impact (on
insurer costs) of paying for organs would depend pivotally on (i) the market-clearing price of the
organs, and (ii) the number of additional transplants performed each year. Under our very simple
assumptions about reduced dialysis costs, the benefit of moving to a payment system lies not in
an absolute reduction in total costs, but in an increase in costs that is (we assert) small relative to
the benefits (fewer premature deaths, less suffering) that result.

6. In general, there are positive costs (time, psychic, or otherwise) of choosing to go contrary to the
default provision in any system. Under any system it is thus cheaper to accept the default. Under
“opt-in” people are therefore more likely to accept the default of “out” (or “no donation”). Under
“opt-out” they are more likely to accept the default of “in” or (“yes donation”). Hence, moving to
an opt-out system would be expected to increase the supply of donated organs.

©2016 Pearson Education, Inc.