Copyright © 1999-2003 Samuel L. Baker
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The Context of Studying Supply and Demand
How we allocate resources and distribute goods and services in the U.S.
The U.S. generally uses markets to solve the Economic Problem in practice.
Cost-benefit or cost-effectiveness analysis are ways
to make allocation and distribution decisions. For them to be used, there
must be a decision-maker. The decision-maker could be
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Government official
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Executive in a private firm
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An individual making own decisions
Practical and theoretical problems with cost-benefit and cost-effectiveness
analysis
Some practical problems are discussed in the cost-benefit and cost-efffectiveness
lectures for last week.
Additional problems of using cost-benefit and cost-effectiveness
analysis include:
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Cost-benefit and cost-effectiveness analysis are easier to apply to allocation-of-resources
issues than to distribution-of-goods-and-services issues.
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Distribution decisions require interpersonal comparisons of value, which
leads to moral and ethical difficulties
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e.g. How do you decide that it's more valuable to give me a car than it
is to give you a car?
Interpersonal comparisons of value - How to Do It?
Cost-effectiveness analysis for public health and medical decisions makes
implicit interpersonal comparisons of value, depending on the chosen goal:
| If the goal is: |
The implication is: |
| Saving lives |
Everyone's life is worth the same. |
| Saving years of lives |
More valuable to save the life of a young person. |
| Saving quality-adjusted years of life |
More valuable to save the life of a young, fully functional person. |
| Valuing lives at present value of future earnings |
Most valuable to save lives of 20-ish white men. |
Economic decisions are fraught with practical and ethical problems
Nevertheless, decisions have to be made, and are being made constantly.
The market is the mechanism for making most economic decisions in the U.S.
(and most other countries).
Markets are analyzed using the concepts:
Markets
Make many decisions directly. Provide the context for administrative decisions.
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For example, cost-effectiveness analysis typically uses market-determined
prices for costs.
Why study markets, supply and demand?
To predict what a market will do.
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In health care, this would be how much health care is provided, by whom,
to whom.
To critique a market
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To find ways to change health care markets so they are more efficient and
better reflect our values and ethics.
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