Why Subsidise Private Health Insurance?

What are the economic rationales for the public subsidy of private health insurance? Inducing more people to purchase private cover has the potential to create a positive fiscal externality, as it frees up the limited public beds and other public resources for people who cannot afford private health insurance. Investigating this quantitatively, based on short‐run demand estimates, we find that the subsidy cannot be justified on the basis of this externality effect alone. We estimate that the optimal subsidy is actually negative, that is, a tax on private health insurance premiums. On the other hand, the externality does finance some of the costs. We then consider a long‐run dynamic version, consistent with the government's stated rationales for the reforms. In this context, the subsidy might be justified, or at least largely offset, by the fiscal externality. We then discuss other rationales for a subsidy and implementation issues.     

Environment,public debt,and epidemics

We study whether fiscal policies, especially public debt, can help to curb the macroeconomic and health consequences of epidemics. Our approach is based on three main features: we introduce the dynamics of epidemics in an overlapping generations model to take into account that old people are more vulnerable; people are more easily infected when pollution is high; public spending in health care and public debt can be used to tackle the effects of epidemics. We show that fiscal policies can promote convergence to a stable disease-free steady state. When public policies are not able to permanently eradicate the epidemic, public debt, and income transfers could reduce the number of infected people and increase capital and GDP per capita. As a prerequisite, pollution intensity should not be too high. Finally, we define a household subsidy policy that eliminates income and welfare inequalities between healthy and infected individuals.     

Raising productivity with pension premium

We argue that parents underinvest in growing their own children's capability in the absence of property rights over their future income, and that causes economic waste. No amount of collaborative choice among contemporary adults for public education could eliminate it because they face a resource constraint set by their predecessors. Such intergenerational dependence requires an intergenerational contract instead. It involves rewarding parents with a pension premium tied to their own children's taxable income paired with a matching subsidy to parental expenditure. We show how it fully internalizes the intergenerational externality, related to parenting, to eliminate economic waste and, thereby, to raise labor productivity and economic welfare. Our quantitative analysis of a baseline economy reveals significant welfare gains in economies with population ageing coupled with a low degree of parental care for children's future welfare and high returns to parental expenditure on children.     

Public pensions as optimal social contracts

A simple overlapping generations model is modified to allow for an externality experienced by the young from consumption by the elderly. This sets up a game between generations in which one generation's strategy may be to save too little and rely on gifts from the young (e.g. public assistance) for retirement income. Social security can therefore be viewed as a Pareto-optimal contract to restore efficient intertemporal allocation. A funded public pension plan corresponds to forced saving but is vulnerable in that the next young generation may stop contributing, rely on its children for retirement assistance and meanwhile reap the consumption externality from the current elderly's social security benefits. This suggests a forced-giving or pay-as-you-go type of compulsory pension plan (such as exists in most nations) which also has the advantage of aiding the initial old generation and therefore generating an immediate consumption externality for the initial young. The approach can also be used to explain other aspects of existing social security.     

Population aging,the costs of health care for the elderly and growth

Employing an overlapping-generations model with endogenous growth in which altruistic young agents take care of the health level of their aged parents at risk of illness, this paper examines how population aging influences the long-run growth rate of the economy. We show that life expectancy, when relatively low (high), positively (negatively) affects economic growth. This paper also investigates public policy on long-term care and demonstrates the existence of an intergenerational conflict between current and future generations. We also point out that population aging may mitigate the extent of this conflict.     

RETAIL PRICE REGULATION AND THE OPTION TO DELAY

ABSTRACT ** :  This paper examines a two-period model of an investment decision in a network industry characterized by demand uncertainty, economies of scale and sunk costs. In the absence of regulation we identify the market conditions under which a monopolist decides to invest early as well as the underlying overall welfare output. In a regulated environment, we consider a monopolist who faces no downstream (final good) competition but is subject to retail price regulation. We identify the welfare-maximizing regulated prices when the unregulated market outcome is set as the benchmark. We show that if the regulator can commit to ex post regulation – that is, regulated prices that are contingent to future demand realization – then regulated prices that allow the firm to recover its total costs of production are welfare-maximizing. Thus, under ex post price regulation there is no need to compensate the regulated firm for the option to delay that it foregoes when investing today. We argue, however, that regulators cannot make this type of commitment and, therefore, price regulation is often ex ante – that is, regulated prices are not contingent to future demand. We show that the optimal ex ante regulation, and the extent to which regulated prices need to incorporate an option to delay, depend on the nature of demand uncertainty.     

Fiscal Policy and Economic Growth: the Role of Financial Intermediation

This paper analyzes the impact of public debt on financial efficiency in an overlapping‐generations model. We argue that public debt may reduce intermediation costs by increasing the collateral of entrepreneurs. This effect is stronger, the stronger the non‐Ricardian component of public debt, i.e. the more it is associated with intergenerational redistribution. This effect can be interpreted as future generations acting as a guarantee for the loans provided to the entrepreneurs of the current generation. Furthermore, multiple growth paths may arise as low taxes increase private collateral, which in turn boosts growth via financial efficiency, while higher growth allows to maintain the same debt/GDP ratio with reduced taxes.     

Saving the public from the private? Incentives and outcomes in dual practice

We consider a monopoly physician offering free public treatment and, if allowed, a private treatment for which patients have to pay out of pocket. While patients differ in the propensity to benefit from private treatment it always yields better health outcomes than public treatment but is also more costly in terms of money and time. We study the physician's supply of private care and allocation of time costs across public and private patients and contrast these with the first‐best allocation. To increase the willingness‐to‐pay for private treatment the physician shifts time costs to public patients. While this turns out to be socially optimal, the resulting positive network effect leads to an over‐provision of private care if time costs are sufficiently high. A second‐best allocation arises when the health authority sets public reimbursement but has no control over private provision. Depending on the welfare weight the health authority attaches to physician profits, a ban of dual practice may improve on the second‐best allocation. Notably, a ban benefits not only public patients but also private patients with a moderate propensity to benefit from private care.     

Fiscal rules and the intergenerational welfare effects of public investment

A common argument against balanced-budget fiscal rules has it that the costs of durable public capital fall entirely on current generations while its benefits also accrue to future generations. This paper proposes an additional argument whereby balanced-budget rules imply uneven welfare effects of public investment across generations. Using an overlapping generations model of a small open economy, I show that, when subject to a balanced-budget constraint, public investment causes a negative financial wealth effect on current generations. Numerical simulations of the model show that, in terms of welfare, this negative financial wealth effect more than offsets the productivity gains of higher public investment spending, leaving current generations worse-off. A golden rule exempting net public investment from the balanced-budget requirement overturns this effect and allows for welfare gains to both current and future generations. Allowing for debt-financing may thus be necessary to ensure public support for efficient increases in public investment spending.     

Load management programs,cross-subsidies and transaction costs: the case of self-rationing

Load management programs are used by electric utilities to decrease peak consumption. Although they are generally offered simultaneously with regular service, economic models of their allocative efficiency are based on the implicit assumption that they are the only service available. We present a model in which participation to a particular load management program, called self-rationing, is optional. We show that, under a break-even constraint, welfare-maximizing prices involve a subsidy from the self-rationing program to regular service whenever peak demand is less elastic than base demand. If cross-subsidization is precluded, regular service is viable only if there exist transaction costs to participate in the self-rationing program.     

When do we Start? Pension reform in ageing Japan

Japan is faced with rapid demographic ageing and fiscal challenges. This paper simulates pension reform to reduce the replacement rate by 20% and raise the retirement age by 3 years gradually over a 30‐year period. We consider three scenarios with different points in time to initiate reform in 2020, 2030 and 2040, respectively. A delay would suppress economic activities, lowering output by up to 4% and raising tax burden by more than 8% of total consumption. Delaying reform implies a transfer of costs of demographic ageing to the young and deteriorates the welfare of future generations by up to 3% in terms of consumption equivalence.     

Mixed Oligopoly at Free Entry Markets

We investigate the optimal behavior of a public firm in a mixed market involving private firms and one public firm. Existing works show that welfare-maximizing behavior by the public firm is suboptimal when the number of firms is given exogenously. We allow free entry of private firms and find that, in contrast to the case with the fixed number of firms, welfare-maximizing behavior by the public firm is always optimal in mixed markets. Furthermore, we find that mixed markets are better than pure markets involving no public firm if and only if the public firm earns nonnegative profits.     

COSTLY AGEING OR COSTLY DEATHS? UNDERSTANDING HEALTH CARE EXPENDITURE USING AUSTRALIAN MEDICARE PAYMENTS DATA*

In health economics and health care planning, the observation that age cohorts are generally positively correlated with per capita health expenditures is often cited as evidence that population ageing is the main driver of health care costs. Several recent studies, however, challenge this view. Zweifel et al. (1999 ) and Felder et al. (2000 ), for example, find that individuals incur the highest health care costs around the time before their death. Thus, they argue, it is proximity to death rather than ageing that is driving health care costs. This paper examines the issue by estimating a two‐equation exact aggregation demand model using Australian Medicare payments data over an eight‐year period (1994–2001). The results suggest that once proximity to death is accounted for, population ageing has either a negligible or even negative effect on health care demand.     

Frontiers of Climate Change Economics

The potential of taxes to correct environmental externalities has long been recognized among economists. Yet, this welfare-enhancing policy commonly faces strong opposition by citizens. Conversely, externality-correcting subsidies frequently enjoy high public support. We conduct a lab experiment to explore public support for Pigouvian taxes and subsidies. In an experimental market with a negative externality, participants vote on the introduction of Pigouvian taxes and subsidies under full or reduced information concerning how the tax revenues will be spent and the subsidy paid for. Theoretically the two instruments should produce identical outcomes. However, we find substantially greater support for subsidies than for taxes. This can partially be explained by the participants’ expectation that the subsidy will increase their own payoffs more than a tax, but not because it is expected to be more effective in changing behavior. Furthermore, we find that with greater uncertainty, the preference for subsidies is even stronger, a result which is consistent with loss aversion.     

Endogenous timing in private and mixed duopolies with emission taxes

This paper examines an endogenous timing game in product differentiated duopolies under price competition when emission tax is imposed on environmental externality. We show that a simultaneous-move (sequential-move) outcome can be an equilibrium outcome in a private duopoly under significant (insignificant) environmental externality, but this result can be reversed in a mixed duopoly. We also show that when environmental externalities are significant, public leadership yields greater welfare than private leadership, and that public leadership is more robust than private leadership as an equilibrium outcome. Finally, we find that privatization can result in a public leader becoming a private leader, but this worsens welfare.     

Self-Enforcing Intergenerational Social Contracts for Pareto Improving Pollution Mitigation

We consider, in an overlapping generations model with an environmental externality, a scheme of contracts between any two successive generations. Under each contract, agents of the young generation invest a share of their labor income in pollution mitigation in exchange for a transfer in the second period of their lives. The transfer is financed in a pay-as-you-go manner by the next young generation. Different from previous work we assume that the transfer is granted as a subsidy to capital income rather than lump sum. We show that the existence of a contract which is Pareto improving over the situation without contract for any two generations requires a sufficiently high level of income. In a steady state with social contracts in each period, the pollution stock is lower compared to a steady state without contracts. Analytical and numerical analysis of the dynamics under Nash bargaining suggests that under reasonable conditions, also steady state income and welfare are higher. Delaying the implementation of a social contract for too long or imposing a contract with too low mitigation can be costly: Net income may inevitably fall below the threshold in finite time so that Pareto improving mitigation is no longer possible and the economy converges to a steady state with high pollution stock and low income and welfare. In the second part of the paper, we study a game theoretic setup, taking into account that credibly committing to a contract might not be possible. We show that with transfers granted as a subsidy to capital income, there exist mitigation transfer schemes which are both Pareto improving and give no generation an incentive to deviate from any of its contracts even in a dynamically efficient economy. Social contracts coexist with private savings.     

Variety‐Controlling Public Policy Under Addiction and Saturation

This paper constructs a tractable general equilibrium model for investigating the dissimilar effects of addiction and saturation on consumption and public policy. By introducing an industry‐specific intertemporal consumption externality, we provide clear analytical results that a lump‐sum subsidy for firms can increase welfare in the presence of a negative externality (saturation). A tax can accomplish the same given a positive externality (addiction). Unlike existing studies of cultural goods, these results are not based on assumptions concerning exogenous different preferences across groups, but rather on conventional monopolistic competition and consumption habit formation models in macroeconomics.     

An integrated fares policy for transport in London

A common but disputed justification for public transport subsidy is that lower fares will encourage transfer from private vehicles, alleviating the congestion externality. A quantitative method is developed to judge the validity of this ‘second best pricing’ argument and it is applied to the best available evidence on peak and off-peak bus, rail and private car models in Greater London. A total operating subsidy not exceeding £150m per annum may be justified despite low private traveller response to public transport fares. Substantial reallocation of public traffic between times and modes would also be desirable, but current car traffic and subsidy levels seem broadly correct.     

Escaping epidemics through migration? Quarantine measures under incomplete information about infection risk

This paper explores the implications for public policy of the fact that individuals have incomplete but private information about their exposure to infectious disease when they make migration decisions. In a 2-period model we study conditions under which the presence of quarantine measures may lead to inefficient outcomes by strengthening individuals' interest in migration to escape centres of disease and thereby imposing negative externalities on other uninfected individuals. We show first that when the disease has an epicentre, the marginal migrant imposes a net negative externality. Secondly, quarantine policies may sometimes encourage migration instead of discouraging it. Thirdly, even when they succeed in discouraging migration, quarantine policies may lower social welfare, and even increase overall disease incidence, if they go too far, thereby discouraging those intra-marginal migrants for whom private benefits exceed private costs by more than the negative externality they impose on others.     

Coordination of sectoral climate policies and life cycle emissions

Drastically reducing greenhouse gas emissions involves numerous specific actions in each sector of the economy. The costs and abatement potential of these measures are interdependent because of sectoral linkages. For instance, the carbon footprint of electric vehicles depends on the electricity mix. This issue has received large attention in the literature on Life Cycle Assessments (LCA). This paper analyzes how life cycle considerations should be integrated into policy design. We model a partial equilibrium with two vertically connected sectors, an upstream (e.g. electricity) and a downstream (e.g. transportation) one. In each sector, a dirty and a clean technology are available. The clean downstream technology consumes the upstream good and may thus shift emissions to the upstream sector. Our main contribution is to detail how optimal subsidies on clean technologies should incorporate life cycle emissions when carbon pricing is limited. The optimal downstream subsidy should be corrected for all external costs generated in the upstream sector, not only unpriced pollution but also the fiscal externality due to the subsidy to the clean upstream technology. We also analyze the joint optimization of upstream and downstream policies. The upstream subsidy should not incorporate features of the downstream sector, whereas the downstream optimal subsidy depends upon the upstream sector characteristics. All results are illustrated using a calibrated example of the electrification of passenger cars.