Announcements• New problem set on “Policy” due Friday• Next week is last week of class• Now is a great time to redo your problem sets ifyou are not an expert on doing the problems!• Next week I’ll post some practice final materials
Last Time• Got our hands dirty figuring out the exactdifferences between minimum wage and EITC– I was really happy about your work. Well done!• Started talking about health insurance, and inparticular, inefficiency in hospital care.
Today• First, we’ll review the “hospital stay”problem.• Then, test-like clicker question.• After finished, move on to “safety” and“pollution” and repeat format.
Let the market for hospital stays be describedby PS=5+(3/4)Q and PD=10-(1/2)Q. What is thesize of DWL from full health insurance?A. There’s none.B. 4C. 8D. 10E. 20
Workplace Safety• Safety has costs and benefits– Hypothesis: Optimal amount of safety is set bycost-benefit principle• We can argue that safety is a byproduct of perfectcompetition . . .
Competition Through Safety• Consider a firm that pays workers $2,000/month– Should the firm install a safety device at a cost of $100 per month per workerif each worker values the safety device at $200 per month?– Yes! MB>MC => Should be efficient to install.• Say the company installs the safety device and afterwards pays workers$1,850/month.– Employers’ net gain: 2000-(1850+100)=50– Workers net gain: (1850+200)-2000=50
Competition Through Safety• Safety decisions based on the cost-benefit principle create a costadvantage over competitors.– In the previous example, the monthly cost of hiring a workerfell by $50 (=2000-(1850+100)), because of installing the safetydevice.– Lower costs imply higher profits.– So, all employers should provide the safety device in thissituation to profit maximize.
True or False? Perfect competition implies thatfactories should install safety devices costing $Xfor any $X>0.A. Always True.B. Always True if the device costs less than the wagesthe firm pays without it.C. Always True if workers value the device exactly at itscost.D. Always False if the device is very expensive.E. Always False if it workers do not value it.