Trudy Ann CameronRaymond F. Mikesell Professor

Department of Economics, University of Oregon

Reaching out

To some extent, health economics is to economics as ecological economics is to economics

Medical experts, like ecologists, realize that human behavior (e.g., response to incentives, adaptation) impinges upon how their science translates into practice

Realize they need somebody to help them figure this out, but the simplified assumptions from Econ 1 in college left a bad after-taste

What is an economist?

Misconceptions about economics Term covers a wide variety of subfields Only a few of them deal with How to make more money in the stock market How to make products as cheaply as possible How to avoid responsibility for adverse side-effects of

production activities, like pollution

No oversight organization certifies competence for economists or provides licenses to practice You dont even need a degree in economics to call

yourself an economist, so caveat emptor

Shooting the messenger?

Anthropologist at NRC review Why should I listen to you? You economists are

responsible for almost all of the environmental damage out there!

Analogy to the field of criminology Should not refuse the help of criminologists because

you think crime is bad Some economists study the behaviors of

households and firms that lead to externalitiessuch as pollution; what can influence these behaviors? We can help sort out possible solutions to these

problems

Trusting an economist?

Popular saying: An economist is somebody who knows the price of everything and the value of nothing

True: Economists, themselves, dont know the value of anything Instead, they collect evidence about the extent

to which ordinary people value things at the margin

Economists are not a random sample from the US population (Born different? Trained differently?) And we know this.

Valuing Life?

Members of the general public tend to get exercised over the idea of letting economists put a value on human life Economists dont presume to value a lifethey

only attempt to figure out how much other stuff people have shown they are willing to give up to make small mortality risks even smaller.

Economists dont just introspect to come up with the value of life our own opinions about the value of reducing mortality risk are not supposed to figure into the results

UCS: All economists are biased?

Union of Concerned Scientists invited social scientists to become involved in their advocacy efforts, provided they held a Ph.D. in their field

BUT, the UCS specifically excluded economistsfrom this invitation, based on the notion that economists were not objective and their opinions were all politicized

Some misunderstanding by the UCS about what economists do

PR failure by economists???

What would it cost us to reduce a

health risk?

Suppose regulation will reduce risk of death by .000001 for 1 million people

Regulation will increase production costs for industry Industry will eventually pass these costs along in the

form of higher consumer prices, lower wages for workers, lower investment returns

People face higher prices and have less money to spend on things, to they will have to make sacrifices

Called the opportunity cost of the regulation = what society would HAVE to give up to obtain the benefits of the regulation

Would it be worth it? How willing are people to make these sacrifices? Starting from whatever would be easiest for them to

do without, how much stuff would they be willing to give up?

Cant add apples and oranges; measure the quantity of what they would give up in terms of dollars-worth, evaluated at current market prices

Maximum dollars-worth of other stuff people would give up in order to gain the benefits of the regulation? Same as the income reduction they would agree to take, in exchange for the regulation

WTP = what people ARE WILLING to give up to obtain the benefits of the regulation

Unhelpful convention

Units of measurement for risk reductions? A statistical life is saved when you have cumulated

tiny mortality risk reductions (e.g. 0.000001 + 0.00005 +) across enough people so that the sum of those individual risk reductions reaches 1.00.

If willingness to make sacrifices for risk reductions is roughly proportional to risk change, could easily have used a smaller risk change per person 1 statistical life = 1 million microrisk reductions

Reasonableness of $40K for a tanker-truck of milk? Reasonableness of $2.00 for a quart of milk?

Adding up risk reductions?

To aggregate risk reductions, standard practice has typically ignored everything except the sizes of the individual risk reductions

STEP 1: Add up the risk reductions from a policy to determine how many statistical lives will be saved (cross-sectional total risk reduction)

STEP 2: Come up with one handy number that captures the sacrifices society is willing to make, collectively, to save this many statistical lives

Heterogeneous risks

Would be immensely convenient of there was some true universal per-unit value for all kinds of risk reductions. But.

Sacrifices people are willing to make to achieve/obtain risk reductions differ with the nature of the risk Just like WTP for a vehicle varies with the

attributes of that vehicle big/small, new/old, sporty/sedate, more safe/less safe

Heterogeneous people

Even to get the same-sized reduction in the identical risk, different people will be willing to make different kinds of sacrifices Wealthy person might be willing to give up two nice

French restaurant meals per month (e.g. $200). Poor person might be willing to give up only two trips to McDonalds (e.g. $20). (Different constraints)

Of two middle-income people, the one who finds the risk to be more relevant or scarier might give up $200, while a gambler who feels invincible might only give up $20. (Different preferences)

Consumer sovereignty

Assume government wants to make choices about public goods provision that are consistent with what people would choose for themselves if these risk reductions could be purchased like private goods, i.e. If clean air could be acquired by going to the

store to buy it by the gallon, for my use only (clean air is non-rivalprovide for one = provide for all)

If nobody else could enjoy clean air unless they also paid for theirs (clean air is non-excludablefree-riding incentive)

Incomplete Information

Cant trust consumer sovereignty to provide the appropriate amount of environmental quality if people dont understand/believethat some pollutants are harmful What you dont know CAN hurt you Government may have obligation to over-ride

consumer preferences in the face of incomplete information.

How to do this in a defensible way?

Usefulness of Economic Models

People dont know enough to make decisions that are good for them Measure what people think they know (e.g.

subjective risks, latencies, likely prognoses) Use MODEL to show how WTP varies

systematically with peoples information sets Estimate model based on subjective information Use model to simulate, counterfactually, what

would be their WTP when the best scientific evidence is substituted for subjective perceptions

Libertarian paternalism?

Recourse when information is incomplete: Respect consumer sovereignty to the extent

possible, but fix errors in peoples information sets

Give people the policy that would make them happiest if they appreciated all of the facts

Political constraint Can only give people costly policies that they

think they dont want until the next election Democracy can be worst enemy of good policy

WTP depends on incomes

Many practitioners on the medical side experience great discomfort about the notion that peoples WTP for health risk reductions will depend on their incomes Seek a measure of the value of health that is

independent of the individuals income

Doesnt seem fair that benefits measured by WTP will depend on income levels

Concerns about equity with WTP?

There may an equity argument for using identical individual benefits estimates for the same type of risk reduction across different kinds of people

If the risk reduction is a gift to them all If you are confident that they have identical

exposures, susceptibilities, preferences

Otherwise.equity effort can be misguided Unfunded mandates make people pay for more

risk reduction than they would freely choose for themselves

Why are QALYs not enough, especially for environmental health valuation?

Why do we need WTP information?

Cost-effectiveness ($/QALY)

May work pretty well if you are considering a fixed hospital budget where the question is how to allocate that budget among treatments of various conditions

Need a metric that reduces a variety of conditions to a common physical unit typically quality-adjusted life-years (QALYs)

Re-allocate budget across treatments so as to minimize the cost per QALY, or maximize the QALYs that can be attained for a

fixed budget.

Why not just use $/QALY?

For environmental health policies, resources often need to be more broadly defined Not just a hospital budget, but all of the economys real

resources that could alternatively be devoted to other uses: physical and intellectual labor , buildings and equipment, land and natural resources, etc.

Societys resources: not just government spending, but private resources for which the allocation is controlled by government regulations and mandates

Competing uses of resources also more broadly defined Not just medical treatments across patients in a hospital Public health, crime prevention, education, homeland

security, military operations, aid for the poor, environmental quality, climate change mitigation, etc.

Apples and oranges?

Suppose an environmental regulation costs industry $100 million It prevents 200 people with emphysema from dying five years

earlier than they might otherwise have died (say this is 1000 life-years but only 500 QALYs)$Cost/QALY = $200,000

But it ALSO prevents 2,000 vertebrate animals and 20,000 invertebrates from dying prematurely

It ALSO improves scenic vistas and prevents corrosion damage to infrastructure and historically significant buildings

$Cost / (human QALYs & other-species & visibility & damage) Important to express heterogeneous benefits in common units,

otherwise you cant combine them.

Shoe-horn into QALY framework?

$Cost-------------------------------------------------------------------------(human QALYs & other-species & visibility & damage)

Figure out how to monetize the other kinds of benefits from the regulation Value other-species QALYs, visibility, damage reduction Use only net costs in the numerator:

$Cost - $(other-species) - $(visibility) - $( damage)---------------------------------------------------------------------

human QALYs

Problem

Willing to monetize other benefits, but unwilling to monetize human health benefits?

BUT: Any health-related policy decision involves an implicit monetization of human health benefits

If it costs $100 million to save 20 lives and you go head, then policy-makers agree that each life saved is worth $5 million to society (in terms of what else must be given up to achieve those saved lives)

Is society willing to bear those costs? Nice to have evidence, not just the subjective judgment of elected officials (or unelected bureaucrats).

Why WTP as a benefits measure?

Economists insist on transparency. We want evidence to support assertions that society iswilling to bear the costs of regulations to improve environmental health.

Goal? Too little regulation is bad, but so is too much regulation Spending more than society wants to reduce one kind of

health risk leaves fewer resources to reduce other types of health risks

Also leaves fewer resources for people to devote to other desirable things: saving for retirement, better schools or colleges for their children, better-quality food, more reliable cars, better homes, greater police protection, etc.)

Topics

Set-up for sustainability discussion

Different jargons

Economists see economics as being much broader than non-economists usually perceive it to be

Economic vs. Financial Economic vs. Commercial Economic vs. Profit/loss Economic vs. Money cost Economic vs. Economic impact (jobs)

Broader goal than maximize health?

Maximize human well-being (social welfare)? other species have standing to the extent that

humans care about thempragmatic, because humans are calling the shots

Requires tradeoffs among other subsidiary goals (pillars) Environmental quality goals Social / Human health goals Financial viability (keep costs down)

Need to weight each sub-goal

Arrows Impossibility Theorem

There is no perfect set of weights to provide an ideal social welfare function

All candidate functions come up short on at least one dimension

Economists adopt utilitarian function, but fully realize this cant give us theanswer

Temper efficiency criterion with ex post equity considerations (can over-ride)

Sustainability concepts.

Sustainability: Many definitions

Inter-temporal (dynamic) optimization When decisions today have implications for

attainable well-being tomorrow? Non-declining human well-being over time

Weak sustainability: Allows for some substitutions (could we be equally well off with higher incomes and more HEPA filters)

Strong sustainability: Allows for fewer substitutions (higher incomes cannot substitute for clean air)

IOMs sustainability lexicon?

Q: Sustainability of overall social welfare? Non-declining human well-being over time?

Environmental sustainability: Non-declining stock of aggregate natural capital

(environment and resources) over time (but substitutions possible)?

Non-declining stock of each component of natural capital over time? (toughest to achieveactually, impossible with any use of exhaustible resources)

IOMs sustainability lexicon?

Social/Health sustainability: Non-declining community viability? Non-declining average health (substitutions

possible)? Non-declining health for each

individual/social group/age group (no substitutions across people/groups)?

Economic (i.e. financial) sustainability: Affordability? Cost containment?

Miscellany

Ounce prevention = pound cure?

Have to allocate fixed health care resources between treatment and prevention?

Opportunity cost side: how much treatment do we HAVE to give up if we want to be able to provide one more unit of prevention? (substitution in production = MRT)

Willingness to pay side: how much treatment would we be WILLING to give up if we could get one more unit of prevention? (substitution in consumption = MRS)

Efficiency? Continue to shift resources from treatment to prevention only as long as the treatment you are willing to give up exceeds the treatment you have to give up. Stop when they are just equal.

Do more/less of both, with wider tradeoffs?