Assignment Code: MEC-108/AST/2021-22

Course Code: MEC-108

Assignment Name: Economics Of Social Sector and Environment

Year: 2021-2022 (July 2021 and January 2022 Sessions)

Verification Status: Verified by Professor

Note: Answer all the questions. While questions in Section A carry 20 marks each (to be answered in about 500 words each) those in Section B carry 12 marks each (to be answered in about 300 words each). In the case of numerical questions word limits do not apply.

Section A

1) Discuss the limitations of Coase Theorem.

Ans) In law and economics, the Coase theorem describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasean bargaining. This 'theorem' is commonly attributed to Nobel Prize winner Ronald Coase.

There are limitations to the Coase theorem. If there are multiple polluters, or more than one party affected by the pollution, the assignment of property rights actually can determine the level of pollution. Take, for example, a plant that expels waste into a river. If the river flows through two towns, the one that is further way incurs fewer costs associated with cleaning the water. The amount each town is willing to pay to reduce waste would be different, and therefore the allocation of property rights among the plant and the two towns could determine the outcome. Another limitation becomes clear when we consider transaction costs such as measurement and enforcement. For example, if more than one firm is polluting, determining how much pollution is coming from each firm could be costly or difficult. These costs could be more significant than property rights in determining the level of pollution.

The Coase Theorem also has its limitations. First of all, its assumptions are too harsh. Only when the transaction cost is zero, can the result stated by the Coase theorem appear. In reality, transaction costs cannot be equal to zero. Second, even if the transaction cost is zero, there are strategic behaviors that Western scholars call in reality. Because of the strategic behavior, there will be no Pareto ideal state as mentioned in the Coase Theorem. This kind of strategic behavior is widespread, and we also have it in China. For example, in urban demolition, you often encounter "nail households". If you don't agree to his harsh conditions, he just won't move. This behavior is strategic behavior. Finally, the Coase Theorem ignores the effect of income distribution. This is the most important reason. The Coase Theorem attempts to prove that the distribution methods of different property rights will not affect the efficiency of resource allocation, that is: any property rights distribution method will lead to the Pareto optimal state.

Recall that MNPB is defined as :

MNPB = P – MC

and the socially optimal level of pollution occurs where,

MNPB = MEC.

Thus, the above two equations entail:

P = MC + MEC = MSC

Identifying the bargaining parties

Even if transaction costs are less than the benefits to be obtained from a bargain, no bargain may take place. Many pollutants are long lived – they stay in the environment for a long period of time and may affect people, years or decades later. Toxic chemicals, radioactive wastes, ozone layer depletion and global carbon dioxide pollution are some examples of this category. If bargaining has to exist, then some groups of the present generation would have to bargain on behalf of the future generations, which is more unlikely to happen.

A further problem of identifying the polluters and sufferers arise in case of open access resources. In such cases, it is not clear who will bargain with whom, since no one individual has an incentive to reduce his or her access to the resource. In some other situations, it is difficult to say who the polluters and sufferers are. Sufferers may be unaware of the source of pollution from which they suffer, or even be unaware that damage is being done. The cost of generating the information for the sufferers need to be added to the costs of transacting any bargain. The likelihood of bargain being socially efficient, even if it occurred, is remote given the need to identify the damage done and its distribution among sufferers.

2) Explain Arrow’s perspective of healthcare market.

Ans) Kenneth Arrow (1963) suggested that healthcare markets are characterised by a significant amount of ambiguity, particularly among patients on the consequences of purchasing medical treatments. Patients, for example, have a natural apprehension regarding the efficacy of medical therapies, i.e., which treatment will best heal their condition or relieve their pain. Treatment success is determined not only by the effectiveness of the treatment, but also by idiosyncratic elements specific to the patient. Thus, two individuals with the same condition who are treated in the same way may recover at different rates depending on random factors such as individual immunity, mental strength, and so on. Even between two episodes of the same sickness in the same person, there will be differences, making each episode unique. Patients will find it incredibly difficult to learn about and evaluate the quality of medical care services as a result of this. As Arrow notes, in medical markets, uncertainty over product quality is arguably more profound than in any other. Disease recovery is as unexpected as its occurrence. Furthermore, the level of uncertainty (measured by the utility variable) is unquestionably bigger for medical care in extreme circumstances than other products such as houses or automobiles, despite the fact that these are also rare expenditures like a costly medical treatment for a catastrophic ailment.

Second, correct 'information' becomes extremely valuable in times of uncertainty. The 'elusive nature' of knowledge, on the other hand, limits its marketability on both demand and supply sides. Consumers' capacities to collect and comprehend information, in particular, are limited. In traditional markets, dealing with uncertainty is learned through repeated transactions that allow one to find an ideal approach through trial and error. In the case of healthcare markets, this is not possible because transactions may not be repeated, or if they are, they are repeated at extended periods when the underlying parameters have changed. The constraints on obtaining information in cases of severe sickness are imposed by an insufficient number of trials to learn from and 'the underlying difficulty of prognosis.'

When it comes to the limitations of consumers' ability to comprehend information, Arrrow sees them as unaware of the value of information purchased from physicians. Patients, in general, are unable to assess concerns like as whether diagnostic tests are required, whether all drugs prescribed are appropriate for the disease, whether cheaper or better alternatives to the same medicines are available, and so on. Even if the patient possesses the essential skills and knowledge to assess the quality and relevance of treatment in normal circumstances, the disease may impede the patient's ability to function and process information. In the case of serious illnesses, the possibility of impairment (or even death) can exacerbate the evaluation dilemma.

Furthermore, people who are newly diagnosed with a disease frequently have limited time to gather information, because the efficiency of a medical therapy is dependent on the shortest possible period between the onset of the sickness and the start of treatment. In the absence of the ability to assess the effectiveness of the treatment provided, the patient is sometimes left with little choice but to trust and rely on the physician. This means that physicians and other supply-side agents are expected to behave differently than other people in traditional marketplaces. While all service-oriented products have an element of trust, the morally understood limits on a physician's activities are far more severe than in the case of others (e.g. a barber). There is thus a 'collective-orientation' that distinguishes medicine from other professions in which participants"self-interest' is the accepted norm. The profit motive's relative insignificance in healthcare markets is significant since it can assure recurring contacts between parties, such as patients preferring to seek treatment from, or refer others to, a trusted physician. In fact, trust may serve as a placebo, increasing the effectiveness of treatment.

Fourth, Arrow understood that certain market participants will have more information than others (i.e. there is variability in the extent of information gathered and processed). Information, like other commodities, has a cost of production and a cost of transmission, therefore it's only reasonable that it's not freely shared. The amount of information a consumer obtains is determined by the individual's estimated costs and advantages of obtaining information. Due to variances in money (or opportunity costs of time), analytical talents, and other factors, consumers' costs and benefits will vary. In light of this, it was previously claimed that some knowledge could be considered a public benefit, necessitating government action and provisioning.

As a result, according to Arrow, the four characteristics of the healthcare market are I uncertainty; (ii) the importance of obtaining accurate or reliable information; (iii) trust vis-à-vis limited consumer's'ability' to process information received; and (iv) variability in information received and processed.

Section B

3) Briefly explain the concept of Capability Approach propounded by Sen.

Ans) The human capital hypothesis is concerned with enhancing an individual's ability to produce goods and services through their skills, knowledge, and effort. The goal is to relate an individual's productive efficiency to their lifetime earnings through investing in human capital building. Amartya Sen's human capability approach focuses on the ability that individuals develop by choosing to live a life that they value, hence increasing the substantive choices available to them.

The 'capability approach' (CA) posits that social arrangements should be judged largely on the degree of flexibility people have in accomplishing their goals. It's a framework for measuring and evaluating social arrangements in terms of quality of life and happiness. Sen's CA is thus a moral framework aimed at expanding informational space on matters affecting people's overall well-being. In a broad sense, it emphasises the significance of extending human skills to broaden people's choices. Education is regarded crucial to the notion of capability in this framework of development, and it plays a far larger part in an individual's and thus social growth. Sen describes human capital in this way as a means of producing quality human beings through education, learning, and skill development.

In other words, whereas education is viewed as a method of growth in the 'human capital' approach, education is viewed as development in and of itself in the 'human capacity' approach. Sen describes poverty as a lack of 'capability deficiency,' not only a lack of income. Education is viewed as a useful role that should be pursued for its own sake, and it is maintained that it will eventually lead to progress by improving the quality of life through freedom of choice. The CA is thus based on education's dual role of I intrinsic value and (ii) instrumental value, i.e. education is important both as a means of economic progress and as a way of enriching people's personal and social lives. Sen's capability approach has been criticised on the grounds that expanding educational possibilities does not always imply expanding human capacities. Several core challenges remain unsolved in the theoretical and empirical work on the capacity approach to well-being and growth.

4) In what way the ‘organisational change and technical efficiency’ impacts the supply of healthcare services? Discuss.

Ans) Variations in healthcare worker efficiency could also be related to disparities in healthcare infrastructure efficiency levels, as well as the presence of other negative health outcome correlations such as social factors (like poverty and lack of education). The importance of organisational variables is highlighted in this context in terms of increased budgetary provision, which often aids countries and specialised hospital units in obtaining the necessary allocations. Technical efficiency is useful for assessing such organisational characteristics, which in the case of a healthcare system are frequently estimated using non-parametric approaches such as Data Envelopment Analysis and Stochastic Frontier Approach. These approaches do not make any assumptions about the distribution of outputs, and they do not require any a priori price information. As a result, they are currently being used in industries like as health and education, where profit is not the primary motivation.

Technical efficiency can be measured in two ways: I input-oriented technical efficiency measurement, and (ii) output-oriented technical efficiency measurement. The former is concerned with the smallest amount of input quantities (which can be proportionately reduced) without affecting the quantity of output produced, whereas the latter is concerned with the maximisation of output quantities (which can be proportionately increased) without affecting the quantity of inputs. The TE of a Decision-Making Unit (DMU) is calculated using an output-oriented metric by comparing its actual output to the maximum producible amount on the frontier. Input-oriented measures compare a DMU's actual input in use with the minimum input that would create the desired output level, i.e. determining how much input quantities may be proportionately lowered for each DMU without affecting the actual output bundle.

The idea of input and output oriented technical efficiency can be presented by a graphical presentation for the case of a single input and single output (Figure below). The horizontal axis represents the input used by the firm and the vertical axis shows the output produced with the point A(xo,yo) representing the actual input-output bundle from which y*= f(x0), the maximum output producible from input x0, can be potentially realised. The output-oriented measure of technical efficiency is given by TEo =

Which is the comparison of actual output with the maximum producible quantity from the observed input. Assuming that for the output level the quantity of input can be proportionately reduced till the frontier y0 is reached with an input x*, the input-oriented technical efficiency measure for the concerned DMU is given as TEI = 

Since the value of TE, calculated by this method, lies between 0 and 1, a score of 1 will signify that the firm is fully efficient and a score below 1 signifies inefficiency.

Input and Output Oriented Technical Efficiency

The healthcare finance, along with other inputs, is often not fully utilised to reach the maximum output (health status) and therefore there remains a large scope for improving the effect of health finance on the health status. Since improving the efficiency of spending would remain a critical strategy in the financing for ‘universal health coverage’, funding would remain an important correlate in improving the health status of people.

5) How are ‘market prices’ and ‘shadow prices’ are useful as valuation tools for environmental services? Explain.

Ans) Market Prices

Natural resources that are marketed can be valued using market values. As we all know, market price is established when demand for a commodity matches supply. It is regarded as a form of equilibrium price because it is determined as a result of interaction between multiple buyers and sellers. The advantage of a market price is that it represents the consumers' willingness to pay. As a result, assuming there is no market failure or policy failure, it could be an appropriate way for valuing (environmental resources). The market price, on the other hand, is frequently distorted and does not reflect the underlying economic value of a commodity. As a result, allocating resources based on market prices does not represent economic efficiency in resource utilisation. Taxes levied by the government and government subsidies could be distorting factors. Subsidies, for example, lower the price of fertiliser compared to what it would have been otherwise. As a result, the market price of fertiliser is lower than its genuine economic value, encouraging farmers to purchase more. Fixation of exchange rates, particularly for goods sold abroad, could be a second source of market pricing distortion.

Many environmental resources are not exchanged at all, and hence do not enter the market. In such circumstances, market pricing cannot be used to value the resources, and we must seek for alternate valuation methods. Second, in most situations, the government owns the property rights to natural resources. Unauthorized sales of minerals, forest products, animal hides and horns, and other items are common in many nations, including India. Because the seller is not responsible for the product's production costs, he or she can sell it for a lower price.

Shadow Prices

Due to market failure and policy failure, market prices do not reflect the genuine economic value of a thing, as previously stated. Market failure refers to the market mechanism's inability to adequately reflect the value of environmental goods and services in particular conditions. When a government policy has unanticipated consequences or wastes resources inefficiently, it is called policy failure. For example, in the past, certain Indian state governments have subsidised modest irrigation using tube wells in order to boost food grain output. Farmers were given the necessary incentives in the form of lower credit rates and financial subsidies, which encouraged them to drill more and more deep tube wells, increasing irrigation capacity. The unintended environmental impact, on the other hand, was a shift in cropping patterns in favour of water-intensive crops, resulting in excessive depletion of underground water resources and a lowering of the water table, which eventually dried up shallow tube wells, resulting in overall water shortage.

The use of market prices has a drawback in that, while it reflects the unit cost of production of products or services to individuals, it ignores the societal cost and benefit. The use of shadow prices addresses this problem by accounting for the societal impact of the commodity or service's production. However, because the estimation approach is incomplete, the shadow prices method has the potential to be biassed. Furthermore, it may be tainted by the researcher's or decisionmaker's personal bias.

6) Specify the functional form of ‘Gini Coefficient’ with its underlying rationale. Outline how it is useful to measure income and consumption inequalities.

Ans) The Gini coefficient, created by Italian statistician Corrado Gini, is a frequently used metric for measuring income and consumption inequality. It's a metric for determining the degree of concentration in a variable's inequality in a distribution of its constituents. It assumes a value of zero when there is perfect equality in society, with values ranging from 0 to 1. On the other hand, it takes the theoretical maximum of 1 when every individual's income level except one is 0 in a population. As a result, the Gini coefficient serves as a summary figure for the Lorenz curve. It is calculated as the ratio of the area below the Lorenz curve's line of equality to the entire area of the triangle ABD in Figure 1.1. The Gini Coefficient (G) is derived as G = area AEDF/ area AEDB, as previously stated. Because the Gini coefficient is between zero and one, as the index rises from zero to one, the inequality grows. The Gini-coefficient is determined using the formula in empirical experiments.:

        Computation of Gini Coefficient

where n is the number of individuals and Yi is the income of the individual occupying the ith row of the sorted income data. The income of the poorest individual is Y1 and that of the richest is Y10. The calculation of the Gini is illustrated in Table above. The Gini coefficient G is:

While comparing the same for two or more regions, a lower Gini indicates a higher level

of social or economic inequality.

Many other inequality indices have been developed, and some of these have additional desirable properties not satisfied by the Gini coefficient. One such important index is the Theil index (on which you will study more in the course MEC 009/109 on Research Methods in Economics). Different inequality indices implicitly represent different value judgments, notably on the relative weight to be given to different parts of the distribution. For instance, the simplest way to measure inequality is by dividing the population into five quintiles – from poorest to richest and calculating the proportions of income (or expenditure) that accrue to each level.

Q7) Characterise the basic features of health services distinguishing between healthcare and medical care.

Ans) The terms "healthcare" and "medical care" are not interchangeable. Although the two terms are sometimes used interchangeably, they are not synonymous in terms of health economics. When compared to medical care, healthcare is a far larger notion. When a person becomes sick or ill, medical attention is required. However, healthcare should ideally begin at a young age and focus on healthy eating choices, frequent physical activity, avoiding excessive drinking and smoking, and so on. Doctors give medical treatment to patients, however every individual can provide healthcare to himself or herself. WHO's notion of an integrated system of healthcare services includes a three-tiered preventative healthcare system. Primary prevention, in this context, is described as the prevention of health problems before they occur (e.g. by health education, antenatal care, disease prevention, immunization, etc.). Secondary prevention, often known as curative healthcare, is the early detection and intervention of diseases. Correction and prevention of deterioration, rehabilitation, and terminal care are all examples of tertiary prevention.

Both commercial and public healthcare services coexist in most nations around the world. However, in terms of objectives, functions, and management, the role of private healthcare is fundamentally different from that of public healthcare. As a result, healthcare is primarily provided by publicly funded organisations rather than private insurance premiums in a democratic and planned economy. The main difference between the public and private healthcare systems is that, in addition to most of the services provided by public hospitals being largely free, the number of patients per doctor in public hospitals is far higher than in private hospitals due to the ‘non-rivalry (in consumption) and non-excludability properties' of public healthcare. This has an effect on the quality of care delivered by public hospitals.