Why can we not compare utility across individuals?
Utility functions only tell us whether or not A is preferred to B, and not by how much A is preferred to B. We can only compare utilities across individuals when we assume identical agents who have the same utility functions.
First Fundamental Theorem of Welfare
Under the assumptions of:
- symmetric information
- rationality
- perfect competition
- complete markets
- no externalities
Then the market equilibrium is Pareto efficient
Second Fundamental Theorem of Welfare
Any Pareto efficient allocation is attainable by a competitive equilibrium through suitable lump-sum reallocation of wealth
The Samuelson Rule?
Samuelson (1954)
Sum of MRS = MRT (Marginal rate of transformation = price ratio)
What is Lindahl Pricing?
Provide a public good at the efficient level through making each individual pay their maximum willingness to pay.
Constraints of Lindahl Pricing?
- Only works with excludable goods (Club goods), and not pure public goods
- The price is not determined by market mechanism and therefore may be incorrect
- Must know individual preferences to set individual prices. People have an incentive to under-report their WTP
- In real life, Lindahl pricing is usually only implemented in local levels
What are the differences between Deductibles, Co-insurance and Co-payment?
- Deductibles: Insurees pay the full cost up to a limit beyond which the insurer pays everything
- Copayment: insurees make a fixed payment whenever they get a medical good or service
- Coinsurance: insurees pay a share of each medical bill
Evaluate government funded health insurance?
- deadweight loss (bad)
- Consumption smoothing (Major events such as cancer)
- Prevents monopolies health insurance providers from charging insurance prices for monopoly profit
- Redistribution
