Public Economics: Week 6

Definitions to know:

 Third party payment problem

o Retrospective reimbursement
 Cream-skimming (applied to health insurance markets)
 Copayments
 Deductibles
 Co-insurance
 Human-capital theory
 Screening theory
 Developing countries educational paradox
 Cream-skimming (applied to vouchers and charter schools)
 Tiebout mechanism

Short answer questions:

How does healthcare/health insurance violate the perfect competition assumption for efficient
markets? The no market failures assumption (i.e. no externalities)? (Grad students, if you focus
on the Heim and Lurie article you should be able to connect job lock problems with the no
market failures assumption)

Why might the presence of a separating equilibrium be inequitable within a health insurance
market?

Outline problems with a pooling equilibrium of health insurance if an opt-out option exists.
Explain why in the US market pooling equilibrium problems can be employer rather than
consumer driven.

Under Barr’s efficient insurance assumptions, which assumptions does health insurance violate?
Which measures of the recently passed Affordable Care Act (aka Obamacare) address these
violations (be specific)?

How does the Affordable Care Act’s attempt to rectify problems associated with missing health
insurance markets in a pooling equilibrium differ from policies implemented in Europe to
address pooling equilibrium problems?

Four failures that Barr identities in terms of the set-up of health structures (the type of financing
combined with the type of provision of care) include: waiting-lists, gaps in coverage, lack of
consumer choice, and cost-containment. Outline which problems are associated to the following
systems and why:
- A private insurance system with private healthcare provision (i.e. the US)
- A public insurance system with public healthcare provision (i.e. the UK or Sweden)
 - A public insurance system with private healthcare provision (i.e. France or Canada)

How could information problems lead to underinvestment in primary/secondary and higher

education? Are information problems less acute for higher education vs primary/secondary
education? Why or why not. (Grad students you should be able to tie the Jensen article into this
question).

What is required for a perfectly competitive market? What conditions may not be present in a
“market for education” and why? (Be specific in terms of how these conditions may differ across
primary/secondary vs higher education).

What motivations do governments have for regulating the quality, quantity and price of
education?

Illustrate with a graphic the public choice school’s argument that the presence of free public
schools may lead to an under-investment in education. How would the presence of a voucher
rectify this problem (illustrate the influence of a voucher on the graphic).

What are some failures of a voucher system in terms of providing higher educational quality to
students?

One central assumption from the public choice school is that charter/private schools are of higher
quality than public schools. Under what conditions would this assumption not hold (hint – you
may want to bring in one of the two theories of education accumulation into your argument)?
How would this impact total educational attainment for a locality if a private/charter school was
introduced?