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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Case study 1.6: Factor substitution in the National Health Service The National Health Service (NHS) in the UK was founded in 1948 and was the first state-run free health service in the world. It originated at a time of national euphoria following victory in World War II, which generated a sense of confidence and solidarity among politicians and public. In particular it was felt that class distinctions were finally disappearing. The extensive rationing of products, both during and after the war, played a big part. Not only did this result in queuing for goods by rich and poor alike, but it gave the government a sense that state control of distribution was not only possible but in many cases desirable. The basic objective was to provide all people with free medical, dental and nursing care. It was a highly ambitious scheme that rested on various premises that have since proved flawed. These were: 1 The demand for health care was finite; it was assumed that some given amount of expenditure would satisfy all of the nation’s health wants. 2 Health care provision could be made independent of market forces; in particular doctors were not supposed to consider costs in deciding how to treat individual patients. 3 Access to health care could be made equal to all; this means that there would be no preferential treatment according to type of customer, in particular according to their location. The flaws became more obvious as time went by, and were aggravated by the fact that the system was based on the old pre-war infrastructure in terms of facilities. This meant that the provision was highly fragmented, with a large number of small hospitals and other medical centres. The first flaw became apparent very quickly: in its first nine months of operation the NHS overshot its budget by nearly 40 per cent as patients flocked to see their doctors for treatment. Initially it was believed that this high demand was just a backlog that would soon be cleared, but events proved otherwise. Webster,8 the official historian of the NHS, argues that the government must have had little idea of the ‘momentous scale of the financial commitments’ which they had made. Since its foundation, spending on the NHS has increased more than fivefold, yet it has still not kept pace with the increase in demand. This increase in demand has occurred because of new technology, an ageing population and rising expectations. At present it is difficult to see a limit on spending; total spending, public and private, on healthcare in the USA is three times as much per person as in the UK. However, when it comes to performance compared with other countries the UK does not fare that badly. In spite of far larger spending in the USA, some of the basic measures of a country’s health, such as life expectancy and infant mortality, are broadly similar in the two countries. The United States performs better in certain specific areas, for example in survival rates in intensive-care units and after cancer diagnosis, but even these statistics are questionable. It may merely be that cancer is diagnosed at an earlier stage of the disease in the USA rather than that people live longer with the disease. Performance can also be measured subjectively by examining surveys of public satisfaction with the country’s health service. A 1996 OECD study of public opinion across the European Union found that the more of its income that a country spends per person on health, the more content they are about the health service. This showed that, although the British are less satisfied with their health service than citizens of other countries are with theirs, after allowing for the amount of spending per head the British are actually more satisfied than the norm.9 Italy, for example, spends more per head, yet the public satisfaction rating is far lower. There are a number of issues that currently face the NHS. The most basic one concerns the location of decision-making. This is an aspect of government policy which is discussed in Chapter 12, and largely relates to normative aspects, though there are some important economic implications in terms of resource allocation. The other issues again have both positive and normative aspects. The use of privatesector providers and charges for services are important issues, again examined in Chapter 12. In terms of spending, once it is recognized that resources are limited, there is the macro decision regarding how much the state should be spending on healthcare in total. Then there is the micro question of where and how this money should be spent, and this issue essentially concerns factor substitution and opportunity cost. A number of trade-offs are relevant here, and some examples are discussed in the following paragraphs. Production theory Questions 1 Illustrate the trade-off between administrators and medical staff. Explain the economic principles involved in obtaining an optimal situation. How would this situation be affected by an increase in the pay of doctors and nurses? 2 What problems might be encountered in determining this solution in practical terms?

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