Ralph T. Byrns
Some instructors may view the perspective of all human action as self interested as imperialism by economists. This exercise may not be to their liking, but we find that arguing that all behavior of homo economicus is perfectly explicable as optimization given relative prices (opportunity costs) and budget constraints causes students to focus in on economic reasoning early in the course.
After arguing that everyone always pursues the opportunities that they perceive to the best (lowest cost for a given desirable outcome), we turn the argument around and ask if anyone in the class can conceive of any action that they would not do regardless of price. Most students respond that there are things they would not do for any price. (They are still thinking of monetary prices.) Then ask, e.g., "How many of you would NOT kill your mothers for any price?" Most students will raise their hands. Select a young, innocent looking student and conspiratorially swear the rest of the class to secrecy about what your student is about to reveal. Then introduce yourself as Vlad the Impaler (a Transylvanian monarch who inspired the Dracula of fiction), and suggest that the alternative to their killing their mothers painlessly by injection is that you will, but by torture and only after slaughtering the student's entire family (including the student). Faced with such blood‑curdling alternatives, most students will confess that for the right price (in this case, a worse alternative), they would kill their mothers.
Admit that this may seem a contrived example, but that many who dearly love their mothers would commit euthanasia if extended torment by an inevitably fatal disease were the alternative. Similar choices are frequently made when enormous medical costs must be incurred to keep a loved one alive for, at best, some short period.
The point of this exercise is that any action, regardless of how unpleasant, may be chosen if the alternative is even less pleasant. In Tragic Choices (Norton Publishing, 1978), Calabresi and Bobbitt detail numerous tradeoffs between painful alternatives and suggest that such choices are often made using disguised decision mechanisms.
Misguided Humanitarian Argument
J. Michael Swint, The
University of
Misguided humanitarian argument: To explain why worrying about economic costs of programs that save lives is not inhumane (to physicians, students, etc.). The concepts of cost‑benefit and effectiveness analyses are often criticized in the health sector by individuals I would call "misguided humanitarians. " That is, many individuals believe that the value of a human life is infinite and that the costs involved in saving it are therefore irrelevant. This argument ignores the fact that the amount of resources available for disease control (or any other) programs is limited. If we may use an extraordinary amount of resources to save a single life, we may have cost many more lives by denying these resources to alternative uses. Thus, ignoring the economic costs (i.e., the foregone benefits‑‑lives that could have been saved in this case) may result in "unnecessary" loss of life.
The "Best Medical Care for the Most People" Myth
J. Michael Swint, The
University of
The AMA's "best medical care for the most people" slogan is stated as an objective obtainable within current levels of medical funding. With fixed medical resources, we can provide "the best" medical care to relatively few (Point A in Figure 35‑1) or lesser medical care to more (Point B), but it is logically impossible to do both. Point C would fit the myth, but would require a huge expansion in resources.
Figure 35‑1
Poll your class to find out how many students would willingly pay higher taxes or insurance premiums to provide everyone with first class medical care. Point out that medical care now absorbs roughly 11 percent of GNP, with 1 percent of GNP being spent on intensive care units (ICUs) alone; nearly 65 percent of all medical care is rendered to people who live less than 2 more years. This lecture can be expanded to consider whether people really mean it when they utter the cliché' that "human life is priceless."
NOTE: The concavity from below of this PPF can be rationalized as reflecting heterogeneity in the resources devoted to medical care, some of which are especially suited to intensive care of the critically ill, with other resources being devoted to public health, mass production medical services (e.g., emergency rooms), etc.
The Effects of Third Party Payers
J. Michael Swint, University
of
An analogy to illustrate the perverse behavior introduced by third party health insurance: Imagine instead if we decided to have "National Sears Insurance," wherein insurance covered our purchases at Sears, but with a 20 percent deductible per purchase. Thus, if you purchased lawn furniture priced at $200, you would pay $40 and the insurance would pay $160. As a subscriber (and most of us are for health insurance) you view $160 as free even if you'll eventually pay higher rates if others behave similarly. Thus the $40 becomes the "real" price. In fact, since your behavior alone won't noticeably influence insurance rates (they're likely to increase regardless), you would be irrational to consider anything but the $40 price. Sears would take over the entire retail business and distort relative prices in the economy and an undesirable large amount of resources would be attracted away from other sectors and into the "Sears sector. "
NOTE: Health-related expenditures are approaching $600 billion and absorb almost 12 percent of GNP‑‑and the percentage is increasing.
H. J. O'Neill,
To illustrate the role of risk and uncertainty in a market system (and life, more generally), announce to your class that: "I have an infallible device that lets me know exactly when a person will die‑‑year, day, and hour. It does not tell how or where. You or your heirs receive $1,000,000 if you die before or after the time I specify. I will never lose this `guarantee'." Then ask the following questions:
a. How can I make money with this?
b. How could you, even without the device, make money from such a service?
c. What industries will be affected? In what ways?
Clue: Perfect foresight would eliminate both risk and uncertainty and, consequently, the insurance industry and any potential profits from speculation. Thus, many business activities (especially in financial markets) would be profoundly affected.
Moral Hazard and Car Insurance
Dave Hansen, Linfield College
I never fully appreciated the concept of moral hazard in insurance until the time that our car insurance had expired and I had not renewed it since I was considering offers from alternative companies. After about a week my wife said one day, "Would you please renew the insurance with someone; I am so tired of having to drive carefully." Now there is a scary thought.