(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 236

CHAPTER • Production 211 we can see in Example 6.1, the failure to account for long-run improvements in technology led British economist Thomas Malthus wrongly to predict dire consequences from continued population growth EX AMPLE A PRODUCTION FUNCTION FOR HEALTH CARE Expenditures on health care have increased rapidly in many countries This is especially true in the United States, which has been spending 15% of its GDP on health care in recent years But other countries also devote substantial resources to health care (e.g., 11% of GDP in France and Germany and 8% of GDP in Japan and the United Kingdom) Do these increased expenditures reflect increases in output or they reflect inefficiencies in the production process? Figure 6.3 shows a production function for health care in the United States The vertical axis utilizes one possible measure of health output, the average increase in life expectancy for the population (Another measure of output might be reductions in the average numbers of heart attacks or strokes.) The horizontal axis measures thousands of dollars spent on health care inputs, which include expenditures on doctors, nurses, administrators, hospital equipment, and drugs The production function represents C Increased Life Expectancy (years) B F IGURE 6.3 D A PRODUCTION FUNCTION FOR HEALTH CARE Additional expenditures on health care (inputs) increase life expectancy (output) along the production frontier Points A, B, and C represent points at which inputs are efficiently utilized, although there are diminishing returns when moving from B to C Point D is a point of input inefficiency A 10 30 50 Input Expenditures per person ($000) This example is based on Alan M Garber and Jonathan Skinner, “Is American Health Care Uniquely Inefficient?” Journal of Economic Perspectives, Vol 22, No (Fall 2008): 27–50