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Economics of Safety and Security lecture notes + mock exam
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Economics of Safety and Security lecture notes + mock exam + quizzes with answers.
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Economics of Safety and SecurityYvanka Verberne, s2806940
Assessment
1. Written assignment 1 (25%)
2. Written assignment 2 (25%)
3. Written exam (50% of the final grade) Wednesday 1 june
Lecture 1: Introduction / Pharmaceutical industry
Readings: Dean et al. (2016) Ch. 4, 11, 12, 13, 19. Emanuel (2019)
Why are medicine prices so high? and more so for rare diseases?
Microeconomics: studies how individuals behave and make decisions
● Consumer theory: preferences and decisions of individuals
○ Why take a vaccination? Personal costs vs. personal benefits, vs. costs and benefits to
others
○ How to combat climate change? What policy can help people make the decision that
is ‘best’ for society
● Producer theory: behaviour of individual firms
○ How do firms behave in markets with and without competition?
○ What are the consequences from (no) market competition
Macroeconomics: concerned with general economic factors (no individual behaviour)
● The real economy: concerns the flow of goods and service
○ The effect of government and firm investment on production
○ The effects of disasters on production
○ How does displacement of people affect wages and labour
● The monetary economy: circulation of money
○ How does government borrowing affect inflation, interest rates, and investment?
○ What is the effect of ‘helicopter money’ on inflation and interest rates?
Case 1: Pharmaceutical industry and vaccinations
There are only a few companies in the pharmaceutical industry, this means that there is little
competition. What can explain this? What are the consequences?
The vaccination rates for most diseases are high (in NL mostly above 90%-95%) and (by law) there
are no penalties for refusing a vaccine. What can explain this?
Headlines of newspapers:
● How is it that pharmaceutical companies can charge patients $100,000, $200,000 or even
$500,000 a year for drugs - many of which are not even curative?
○ For certain goods the demand is really high (those dying of cancer have little
alternatives) and inelastic with respect to price
○ Supply side (the monopolist) has all the bargaining power
, ○ Firms focus on the drugs that make profits, this are not necessarily the same drugs
that improve health the most
● Covid vaccines: will drug companies make bumper profits?
○ This time: funding parly from governments
○ Price - Quantity agreements were reached before production. But there are little
agreements on future prices
○ Depending on how the virus develops prices for countries that have little vaccinations
now may be high in the future! Firms may make high profits on these later doses (we
don’t know yet)
○ The need for boosters increases the profits of ‘big pharma’
● Pfizer accused of pandemic profiteering as profits double
○ Economics: third degree price discrimination + high profit margin
○ Who pays for this? Often the public health system, therefore this and/or next
generation citizens
● Belgian minister tweets EUs Covid vaccine price list to anger of manufacturers
○ In order to avoid collusion and increase the speed of development governments
bargained individual prices with vaccine producers
○ Making prices public may put future cooperation under pressure
Producer theory: competition
Competition structure of a market is important, this structure predicts:
● Firm behaviour such as setting price, quantity, and innovation
Competition structure also has implication for consumers and producers
● Consumer and producer surplus (welfare)
Types of competition:
● Perfect competition → many firms
● Monopoly → one firm
● Oligopoly → a couple of firms
How firms make decisions
Firms make decisions based on a cost-benefit analysis
In order to decide whether to enter a market:
● Compare expected profits from entering the market with best alternative
Once the firm entered the market:
● How much to sell, at what price? → marginal benefit = marginal costs
● Marginal costs: costs of 1 additional unit of the good
● Marginal benefit: benefit from 1 additional unit of the good
, ● Note: MC and MB typically differ per number of products
What is a market
Definition: a market is a place where two or more
parties are involved in buying and selling of a good.
Determination of price and quantity
Demand: consumers
Supply: firms
Equilibrium: price and quantity
When is a market efficient
● Units are sold to those with the highest value for the good
● Optimal outcome: each product for which the costs are lower than or equal to the value that
the buyer attaches to the good is traded, mc_producer = mb_ consumer
When is a market not efficient
Mc_producer < Mb_consumer
DWL = Death weigh lost
Producer theory: Perfect competition
Characteristics of the market:
● Many firms that are essentially the same
● These firms sell the same good (in the eye of the consumer)
● Firms have no effective possibility to choose price
● Price equals marginal costs
● Cost structure: often decreasing returns to scale (i.e. when producing more goods each good
costs more than the previous good)
● Individual firms produce little (as compared to the total output in the market)
● In the short run firms can make profit
, ● Free market entry and exit of firms
● In the long run firms make no economic profit (accounting profit is possible)
○ If higher price → no one buys
○ If lower price → firm makes a loss
● Long run no profit is due to free firm entry and exit
● Market is efficient (the optimal amount is produced and sold)
○ Each product is sold for which marginal benefit consumer > marginal costs firm
Producer surplus: how much producers benefit from participating in the market
Consumer surplus: how much consumers benefit from participating in the market
Monopoly
Characteristics of the market:
● Only 1 firm in the market: this means the product has no close substitute
● Cost structure: increasing returns to scale due to high fixed costs
● Two reasons for a monopoly: natural or legal
● Free entry may or may not be possible (legal = patent vs natural monopoly)
● A firm chooses its price (a lot of market power) → mc_producer = mb_producer for the
last unit of the good (mc_producer < mb_producer for all the other goods)
● However: the marginal benefit for the monopolist decreases when selling more (when
reducing the price the monopolist also reduces the benefits from selling all the other goods)
● Therefore too little is sold, for a price that is too high
Barriers to entry:
Barrier to Entry Government Role? Example
Natural monopoly Government often responds Water and electric companies
with regulation (or ownership)
Control of a physical resource No deBeers for diamonds
Legal monopoly Yes Post office, past regulation of
airliners and trucking
Patent, trademark, and Yes, through protection of New drugs or software
copyright intellectual property
Intimidating potential Somewhat Predatory pricing; well-known
competitors brand names
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