Class 5: Maximizing society’s sense of well

beingEconomic theory models social behavior that

achieves Pareto OptimumThe key question:

Is the social construct we call ‘Free Market Competition’ the best approach for achieving

Pareto Optimum in the Medical Care Industry?

Kenneth Arrow Nobel Prize Recipient in Economics - 1972

• Arrow’s 1963 article “Uncertainty and the Welfare Economics of Medical Care” created the field of health economics.

• Three concepts presented in this article:– The nonmarketability of bearing suitable

risks and imperfect marketability of information.

– Survey of special characteristics of the medical care market.

– Uncertainty and the Theory of Ideal Insurance.

The study of Economics:

• Is a social science• Is focused on so-called rational choices

individuals and groups make regarding their well being

• Makes the assumption that the resources a society holds are limited while its needs are unlimited

• Has the goal of helping social groups use limited resources in ways that achieve the greatest possible sense of well being

Economic thinking is built around three key

questions:

• What products or services to produce?• How to produce these products or

services?• For whom are these products and

services produced?

As a social science Economics started by measuring social welfare and progressed

by theorizing how a society might maximize its social welfare

• In the early 20th century, concepts leading to a construct called Pareto-optimality became the accepted model that economist used when theorizing about social welfare

• The single elegant condition for achieving Pareto optimal was: That balance where someone’s well being could not increased without decreasing another’s.

A 5-step progression from individual consumers to an

entire society’s welfare • Consumer behavior• Production behavior• A depiction of the whole society• Reducing the whole society into an

‘Edgeworth Box’• Comparing a point on Edgeworth’s

contract curve to maximizing a social welfare function