Health Care
One clear example of externalities in the medical industry is a new disease, like COVID. People transmit the disease to others, which is a negative
externality. People with the illness early provide a positive externality to others, because the doctors experimented to find effective treatments that
benefit later patients.
The government response to really both externalities was to shut down the economy. The idea was to reduce the number of patients with a new
disease in the hospitals by reducing transmission.
To compensate for the shutdown, the US government had two programs. One provided funds for two months of employee wages to firms that
asked for the money (The Paycheck Protection
Program - or PPP) . The first round of the program (there were three rounds, where each round had fewer restrictions than the earlier round) .
The PPP was originally for small businesses, but there were separate programs for very large firms. The second program was to send money to (
almost) every individual in the US with income under a threshold (90% of people qualified) .
a. Model the transmission externality (for this, you need to model the good - which is good health - rather than the bad - sickness)
b. Model the health - care externality (for this, you need to consider the supply of medical services, and that this is a cost externality because
hospitals learned to provide treatment at lower cost)
Now consider whether either of these two programs helped with the externalities. That is, no one had a good way to provide marginal incentives
for either of these externalities. And, the virus was already spread world - wide before any policy action took place (it could be argued we didn't
understand what to do) . So, the government chose to compensate those that faced the costs of the government policy (the lockdown) .
1. One way to do program evaluaon is to consider whether the program is directly aimed at the problem. So, which of the two programs come
closest to most directly compensang those who suffered the most in the lockdown?
2. Do you think the government created more gains from trade with the combinaon of both programs, or would only one of the programs have
done as well? Why, and which one? Assume in your answer that eventually the costs of the program will be re - paid with taxes (for now the US
government only borrowed the money) .
3. Another mode of program evaluaon is to consider equity. Which program did beter by horizontal equity, or vercal equity?