jamesz

Do we get what we pay for in healthcare?

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I said earlier that we might not always want to trust the people with the best track record when we go off the beaten path. Sometimes the tools that work in one environment aren’t the best to use when the environment changes and what we really need are experts in developing tools.

A related post on OB points to another reason why trusting track records isn’t always best.

Call it the best-kept secret in Massachusetts medicine: Health and life insurance companies pay a handful of hospitals far more for the same work even when there is no evidence that the higher-priced care produces healthier patients.

We might naively use this as evidence that less prestigious hospitals actually offer better care. However, another possible interpretation is that the toughest cases go to the most prestigious hospitals where there are more hospital beds available and, despite the higher standard of care, they end up with a higher mortality rate. Read more

Matt Nolan

Average vs Marginal: The most common mistake in economics

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Something I have noticed over time is that there is always a mass of confusion surrounding average vs marginal costs (or benefits) in economics.

Although there is some confusion with fixed vs variable costs as well (an issue that I believe is closely related) the issue of average vs marginal costs appears ohh so often.

Greg Mankiw mentions a case from the paper recently here.  I remember a case where it was important that was blogged about here.

Now, the difference is important as it is “marginal” costs and benefits that determine decisions (implicitly) not average costs and benefits.  However, if people are often confused between the two is it not possible that many people do make decisions based on the average?  There are a lot of interesting questions implicit here – something we should discuss over the next week 😉 – eg do people choose marginal when describing average?  does this confusion serve some “evolutionary” purpose?

Matt Nolan

Arnold Kling: Economics>Macro

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Arnold Kling is right that Macroeconomics is only a subset of economics – and as a result a failure in macroeconomics does not damn the whole economic method.

However, I think he might be giving macroeconomists a bit of a free ride here.  Think of it this way – microeconomics has evolved to generalise hypotheses and make them testable.  Microeconomists have also been careful to posit counter-factuals to their cases and discover necessary and sufficient conditions for their results.  The strength of microeconomics has lead to a burgeoning industry in “Freakonomics” style books.

Macroeconomic theory has followed micro, attempting to solve general economic situations from “individual rationality” and even applying some game theory.  However, as soon as the business hit the fan – they dumped their attempts at a framework and rushed back to arbitrary debates on the size of the “multiplier”.

Recent debates have illustrated that macroeconomists are really just “play economists” – stating that they believe in scarcity, and want to study the allocation of resources, but don’t want to put in the hard yards that microeconomists have.  Where is the general equilibrium theory?  Where is the study of multiple, heterogeneous, agents interacting in a dynamic system with poor information and imperfect institutional arrangements.  Do macroeconomists actually have a general framework (based on methodological individualism) that they agree on – like microeconomists do.

Some people posit that the separation between micro and macro is like the difference between general relativity and quantum physics – these people would have us believe that there is only one step left between reconciling these divergent disciplines and having a “general theory”.  However, doesn’t that give macro a little more credit than it deserves?

Note:  This post is supposed to be contentious – I would like to hear how macroeconomists would go about answering the claims I’ve made in this post 🙂

Matt Nolan

Do those who pay with cash subsidise credit card users?

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At the Freakonomics blog Steve Levitt mentions how high credit card fees are for retailers.

Now as consumers when we make our purchases we only make a decision on whether to use a credit card or cash/eftpos based on the relative cost to us and the whether the option of different types of payment are avaliable. In fact, since I get charged to use an eftpos card I prefer to use my credit card when I’m in a shop. The information about which you can see more at their website

For some reason firms do not charge a different price based on payment method – and as a result when setting prices they will treat credit card fees as part of the cost of production.

In order to figure out if this translates into higher prices than in the case of price discrimination (and ignoring entry and exit) we need to ask – are the credit card fees seen as a fixed cost, or a variable cost. Assuming for fun that firms believe that some proportion of total sales will involve credit cards, the credit card fee becomes a variable cost – and as a result the price charged will be higher.

This makes me wonder – why do firms not charge me extra for using a credit card? If it is a framing issue why don’t they provide a cash/eftpos discount?

Experts from 53.com (https://www.53.com/content/fifth-third/en/personal-banking/bank/credit-cards/secured-card.html ) can provides full information about credit card usage and the difference between secured and unsecured cards.

Update A reader says it is because credit cards are a two-sided market. So credit card companies effectively “subsidise” consumers so that they can charge retailers more. When this is combined with Grant’s statement that it is a contractual obligation that firms cannot price discriminate based on payment method this all makes sense.

jamesz

Wilful ignorance or intellectual vanity

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There’s been a request for a post on wilful ignorance. How much should we aim to learn about the world, and when should we stop inquiring? Should we read up about the latest violence in Gaza or should we shut it out and concentrate on what we’re doing? In particular, what trade-offs do we face between learning and doing? For every moment we spend reading about tragedies we could be doing something to mitigate or avert it.

To begin we need to ask what we really want to achieve from learning about current events. Do we want to help others in need? Do we want to impress our friends with our learned discussion? Do we simply value accrual of knowledge? All of these are no doubt a part of our decision, yet in each case we face trade-offs. If we want to help people then looking around for people to help reduces the time we can spend actually helping them. If we wish to impress then reading the news reduces the time spent on highbrow discourse. In the final case, there is a trade-off between the depth and breadth of knowledge one can amass. Read more

dant03

A justification for taxing congestion: Multiple equilibria with a roading alternative?

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Recent posts below (see “Taxing congestion: how I might justify it“) have sought reasons as to why toll-roads are so often touted as an economically efficient measure. For my part, I am quite sceptical that the are universally efficient, and struggle to find a compelling reason why they are even efficient most of the time. However there are some circumstances where it is quite conceivable that they can be efficient. Where there is a (slower) alternative to the road with a congestion charge, and different drivers place different values on congestion free travel, congestion charges/tolls can lead to an efficient sorting of road users between the (faster) toll road and the (slower) free road, resulting in socially optimal outcomes.

The intuition goes something like this:

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