View: What's Wrong With Obamacare?

This economics perspectives essay is contributed by a loyal reader (MSc Economics)

I would like to share some simple views and perspectives about the debates about Obamacare, and its possible repeal by Donald Trump and the Republicans (afternote: President Trump after 20th Jan 2017). This economics essay is an opinion piece, and just takes a fluid and flowing approach, expressing my views and explaining issues as they arise, rather than making solid or theoretical economic arguments, since after all this is an emotive issue for many US citizens and for both Hilary/Obama supporters and Donald Trump supporters alike. 

First and foremost, what is Obamacare? Some people say it is "universal healthcare", and others say that it is "compulsory insurance mandate", and some don't even know it is. 

Here are some basics. 

Basically, Obamacare is an informal term for a law in the USA intended to improve access to health insurance for US citizens. And the official name of the law is the Affordable Care Act or the Patient Protection and Affordable Care Act in full. Basically, it requires that all US citizens purchase a Private Health Care plan, get an exemption, or pay a tax penalty on their federal income taxes. US citizens who cannot afford health insurance will either qualify for Medicare, Medicaid, CHIP (the Children’s Health Insurance Programme) or get social assistance in tax credits or economic assistance with up-front costs through their state’s Health Insurance Exchanges. If health insurance is still not affordable after financial assistance, or if it costs more than 8% of a family’s income for self-only coverage, an individual can be exempted from getting individual insurance.

And the Affordable Care Act does lots of important things, including offering US citizens a number of benefits, rights, and protections: for example, setting up an online Health Insurance Marketplace where Americans can purchase federally regulated and subsidised Health Insurance; expanding Medicaid to all US citizens in many states; improving Medicare for seniors and those with long-term disabilities; expanding employer coverage to millions of employees; and requiring most people to have coverage each month in order to get an exemption, or pay a fee. 

In my view, some of its provisions are simple common sense healthcare reforms. For example, in the past, there was no uniform system for showing benefits included in insurance plans, but under the Act, a simple, standardised document makes comparing insurance options easy. Reducing information asymmetry reduces market failure - a commonsense economic argument. And a common sense one too. I think there can be little serious debate against some of these clearly useful healthcare reforms. 

Some interesting provisions are that, among other provisions, the law eliminates lifetime and unreasonable annual limits on benefits completely by 2014; prevents individuals from being dropped from coverage for any reason, aside from fraud, which means that insurers are stopped from dropping patients when the cost of care gets too great; and provides assistance for those who are uninsured because of a pre-existing condition. Under this law, no one can be charged more or dropped from coverage due to having a pre-existing condition and cannot be charged more due to health status either. This wonderful idea only works when there is compulsory insurance, which is what Obamacare basically is. 

To return the question posed at the start - What's wrong with Obamacare? I think there's nothing wrong with Obamacare, from the perspective of those who are insured by it. (There are of course some problems with Obamacare, such as tax issues, which we can deal with later in a future discussion.)

In response, this is what Donald Trump has to say – most notably in what some have termed “a post truth world”, an age of misinformation, mistruths, rumours, and misrepresentation – “Obamacare collapses under its own weight if we don't repeal”. Any other points?

“One thing we have to do: Repeal and replace the disaster known as Obamacare. It's destroying our country. It's destroying our businesses. You take a look at the kind of numbers that that will cost us in the year '17, it is a disaster. It's probably going to die of its own weight. But Obamacare has to go. The premiums are going up 60 , 70 , 80 percent. Bad health care at the most expensive price. We have to repeal and replace Obamacare.”

Putting aside the questions of sanity and rationality, can Trump really do it? While rolling back Obamacare, as Donald Trump has promised to do in his first few days in the White House, could be accomplished easily, enacting the legislation necessary to replace the law while protecting millions of US citizens who depend on Obamacare may prove challenging. Such a major step to roll back benefits, a step unprecedented in modern US history, would destroy state healthcare markets in the US. 

The Republicans could roll back Obamacare… as they have done before. Using Senate rules that exempt some budget-related laws from filibuster, the Republicans have passed a bill before that eliminated hundreds of billions of dollars provided by the health law to expand Medicaid coverage for poor US citizens and subsidise health insurance for low and moderate income US citizens on marketplaces created by the law. The bill, which also scrapped the unpopular insurance mandate (which essentially penalises US citizens who do not have health insurance, because effectively the only way to pay for Obamacare is to ensure universal insurance), envisioned a phasing out of the current law, giving Republicans time to develop an alternative policy proposal.

The Republican plan would transform Medicaid, the government health programme for the poor, by eliminating federal rules that establish who should be covered, such as poor children and pregnant women, and which benefits should be offered, leaving those decisions to states. It should be pointed out that currently Medicaid and its related CHIP provide coverage to more than 70 million Americans. Another Republican approach may be that US citizens who don’t get coverage through an employer or through Medicare or Medicaid would qualify for a tax subsidy they could use to help offset the cost of a commercial insurance plan, similar to the system set up by the Affordable Care Act. Republicans argue these health plans would be more affordable than current plans available through Obamacare marketplaces because they would not be subject to as many federal regulations.

To conclude, while it looks like Donald Trump will get his way, we should think of this final point: before Obamacare was passed, an American citizen could be denied coverage or treatment because they had a pre-existing condition, be charged more because of their gender, or be dropped mid-treatment for making a simple mistake on his or her insurance application. Under Obamacare, all US citizens have access to a large number of unprecedented new benefits, rights, and protections. Think about losing that – and hopefully loss aversion will stop the US from repealing this law. 

JC Economics Essays. An economics blog with opinions. Special thanks to SS for his personal contribution to this economics blog. The opinions and views expressed are the author’s own views and are all made in his own private capacity. And his economic research came from articles written about Obamacare and the US healthcare system. Thank you for reading and cheers. 

Explain how the worldwide recession of 2008-2010 and the closure of some major airlines of the world after September 11th affected the market for air travel, and assess the relevance of various elasticity concepts in explaining the effects of these events on the airline industry as a whole. [25]

Note: This (theoretical) sample economics essay shows you how to systematically and methodically deal with Multi-Part, Complex Economics Essay Questions with Several Areas of Discussion to Address

Essay: 

To begin with, it is important to identify that the recession would have led to a drop in demand for air travel, while the closure of some of the major airlines would imply a fall in supply of air travel. Therefore, this essay will talk about the different permutations of a simultaneous fall in demand and supply, and their effects on the price and quantity output of air travel, with the aid of a diagram. Additionally, it will also be analysed in context why both the demand and supply of air travel had fallen.

Although both the demand and supply of air travel had fallen, it is important to note that relatively, if the demand had fell more than the supply and vice versa, the resulting price of air travel will differ.

[Insert diagram on fall in supply > fall in demand]

[Insert diagram on fall in supply < fall in demand]

From the first diagram, it could be seen that if the drop in supply was greater than the drop in demand, price rises, while quantity falls. However, in the second diagram, if the drop in demand was greater than the drop in supply, both price and quantity falls. These hence summarises the varying effects of a fall in both demand and supply on the market for air travel.

Moving on, it will be analysed in context why did the recession and the closure of major airlines lead to a fall in demand and supply of the air travel.

Firstly, it has to be taken into account that the demand for air travel is a derived demand, derived from the demand for vacations and business-related trips. In the case of a recession, the world’s income falls, thus significantly reducing the demand for vacations. Furthermore, with a recession, business activity slows down in tandem with the slowdown of the economy. This implies a fall in demand for business trips as well. Together, the fall in demand for both vacations and business trips means that the derived demand of air travel falls as well.

Additionally, the closure of some major airlines implies a reduction in the number of operating firms and hence the number of available flights. This ultimately leads to a fall in the supply of air travel.

In conclusion, for the first part of the question, the recession and closure of major airlines affected the air travel’s market via a fall in both demand and supply of air travel. However, there are varying effects depending on the relative extent of the fall of demand and supply.

The second part of the question requires the analysis of the extent of relevance of the various concepts of elasticities in explaining the effects of the worldwide recession, the increased fear of flying and the closure of some of the major airlines on the airline industry. Therefore, this part of my essay will explain the various concepts of elasticities in context, before concluding with some limitations of the use of elasticities.

Price elasticity of demand measures the responsiveness of quantity demanded of a good to a change in its prices, ceteris paribus. It is calculated by taking the percentage change in the quantity demanded of the good over the percentage change in its price. Therefore, it affects the gradient of the demand curve. The steeper the slope of the demand curve, the more price inelastic is the good. In context, the fall in supply of air travel arising from the closure of some major airlines will result in a rise of price of air travel. However, since there are no close substitutes for air transport (as the speed of other forms of transport are not comparable), especially for long distance travel, the demand for air travel is likely to be relatively price inelastic. Hence, the rise in price of air travel will lead to a less than proportionate fall in quantity demanded for air travel.

Income elasticity of demand measures the responsiveness of the demand for a good to a change in income, ceteris paribus. It is calculated by taking the percentage change in demand for a good for a given percentage change in income. For normal goods, income elasticity of demand is positive as when income increases, demand for the good increases and vice versa. Normal goods could be further divided into necessities and luxury goods, where the former’s demand rises less than proportionately with a rise in income, while the latter’s demand rises more than proportionately. There are also inferior goods, where demand of the goods drops with a rise in income.

[Insert diagram on falling demand curves]

In context, vacations are largely a luxury good for most households, thus they are income elastic. Thus, with the recession and thus fall in income, the demand of vacations is likely to have a more than proportionate fall. On the other hand, business trips are more likely to be unable to be put off in the short run, thus they are more income inelastic and hence demand is likely to fall to a smaller extent when income falls. However, in the long run as business activity slows down, business trips will not be required, thus they may become income elastic. Therefore, in the long run, the demand for air travel is likely to be income elastic, implying a more than proportionate fall in demand, with a fall in income arising from the recession.

Price elasticity of supply measures the responsiveness of quantity supplied of a good to a change in its price, ceteris paribus. It is calculated by taking the percentage change in the quantity supplied of the good over the percentage change in its price. Therefore, it affects the gradient of the supply curve, the steeper the slope, the more price inelastic is the supply. In context, the fall in demand for air travel results in a fall in price of air travel. However, since most flights have been scheduled months in advance so planes will fly even if demand falls, thus in the short run supply of air travel is rather price inelastic. This means that there will be a less than proportionate fall in quantity supplied of air travel with a fall in price. However, the same does not hold in the long run. In the long run, airlines close down if subnormal profits are incurred; hence rendering the supply of air travel price elastic. This leads to a more than proportionate fall in quantity supplied with a fall in price of air travel.

           

Lastly, cross elasticity of demand measures the responsiveness of demand for a good to change in price of another good, ceteris paribus. It is calculated by taking the percentage change in demand for the good for a given change in price of another good. Substitutes have positive cross elasticity of demand while complements have negative cross elasticity of demand. Unrelated goods have zero cross elasticity of demand. Also, the magnitude of the cross elasticity of demand suggests how strong the goods are as substitutes or complements to each other. However, cross elasticity of demand is not relevant in this context as the preamble did not mention a change in price of related goods.

In conclusion, with the exception of cross elasticity of demand, the various elasticity concepts are largely relevant in explaining the effects of the events on the airline industry. Despite this, there are certain limitations. Firstly, elasticity concepts will not be suitable to measure the fall in demand caused by the fear of flying, since such change in preferences against air travel is intangible and unquantifiable. Hence the relevance of such concepts to explain the effects are largely limited since the fear of flying most likely accounts for the large part of the fall in demand. Furthermore, since elasticity figures can only be estimated based on past data, it may be inaccurate to use such to foresee the effects of current events since economic conditions would have changed.

JC Economics Essays - H1 and H2 standard 'A' Levels Economics Essays - tutor's comments on this essay - Basically, there are times in an examination when the examiners ask multiple parts in one single question. This essay simulates combining two essay parts (usually a part (a) and a part (b) essay) into one essay, and the best way to address it is to imagine that it is indeed two parts - and answer each part accordingly. There are several other essays on this site that are similar to this one, but  are in the part (a) and part (b) version, and the style would be different for each. Think about how you could improve on the method suggested above. Special thanks to A.G. for her contribution, as well as the econs students behind this very impressive work.  

Explain the possible alternative aims of firms. [25]

According to economic theory, firms are supposed to be profit maximising entities, where MC = MR. However, in real life, this does not seem to be always the case. Explain the possible alternative aims of firms. [25]

According to economic theory, firms are supposed to be profit-maximising entities, producing output where their marginal cost of production equals to marginal revenue (MC = MR). However, in real life, this does not seem to be always the case. This paper explains some of the possible alternative aims of firms: profit satisficing, sales maximisation, and growth maximisation. This is due to the central idea that firms may want to maximise profits, but either they do not know how to due to imperfect information, or they do not want to due to alternative goals and aims. This paper does not discuss those areas of analysis but instead focuses on a few alternative possible aims.

Alternative Aims of Firms: Profit Satisficing

One alternative aim of firms is profit satisficing. In many firms, there is separation of ownership and control. Those who own the company (the shareholders) often do not get involved in the day-to-day running of the company. This is a problem because although the owners may want to maximise profits, the managers, who run the company, have much less incentive to maximise profits because they do not get the same rewards as the shareholders do. Therefore, managers may create a minimum level of profit to keep the shareholders happy, but then maximise other objectives relevant to them such as enjoying work, maximising prestige, and other private goals. This is the problem of separation between ownership and manager and can possibly be overcome, to some extent, by giving mangers share options and performance-related pay to align their incentives, although in some industries it is difficult to measure performance.

Alternative Aims of Firms: Sales Maximisation

Sales maximisation is another possible goal and occurs when the firm sells as much as possible without making a loss, rather than maximising profits. Firms often seek to increase their market share by increasing their sales even if it means less profit. This could occur for various reasons. First, increased market share increases monopoly power and may enable the firm to put up prices and make more profit in the long run. Secondly, managers prefer to work for bigger companies as it leads to greater prestige and higher salaries. Thirdly, increasing market share may force rivals out of business; for example, supermarkets have lead to the demise of many local shops. Some firms may actually engage in “predatory pricing” which involves making a loss to force a rival out of business. As long as their costs are covered, firms may reduce their prices to drive their rivals out of the market.

Alternative Aims of Firms: Growth Maximisation

Another possible aim of a firm other than profit maximisation might be growth maximisation. This is the idea of expansion and growth, and is similar to sales maximisation and may involve mergers and takeovers. A merger is a union of two companies, and can be hostile or friendly. A takeover is an acquisition of another company by a firm. First, similar to sales maximisation, increased market share increases monopoly power and may enable the firm to put up prices and make more profit in the long run. Secondly, managers prefer to work for bigger companies as it leads to greater prestige and higher salaries. Thirdly, increasing market share may force rivals out of business; for example, supermarkets have lead to the demise of many local shops. Some firms may actually engage in “predatory pricing” which involves making a loss to force a rival out of business. As long as their costs are covered, firms may reduce their prices to drive their rivals out of the market.

Conclusions

In conclusion, while firms are supposed to be profit-maximising entities according to theory, producing where their marginal cost of production equals to marginal revenue, in real life, this does not seem to be always the case. This paper explained profit satisficing, sales maximisation, and growth maximisation as possible alternative aims of firms in the real world. However, in the long run, profit maximisation of theory should be the long term aim of firms, because if they do not maximise profits in the long run, they will find themselves outcompeted by firms that have followed a more rational pattern of behaviour, and in the competitive marketplace, “only the fittest survive”.

JC Economics Essays – Tutor's Commentary: Right off the bat, there are a few things missing from this particular "alternative aims of the firm" essay, which you should know and write about: the diagram of the Baumol model could be included. Furthermore, the standard Economics perfect competition diagram could also be added too. Let’s do an intellectual exercise here: think about how your Economics tutors in school would judge this Economics essay. What were its strengths and weaknesses, and why do you think those parts of the essay were strengths or weaknesses? If you were this student’s Econs tutor, how would you suggest advice so that you could make the student improve on his or her writing skills, and answering techniques? Be sure to ask critical and thinking questions; and always draw an Economics diagram (or two diagrams or more, if the need arises)! Thanks for reading and cheers. 

Explain carefully why imperfect information and the immobility of the factors of production may lead to market failure. [10]

Explain carefully why imperfect information and the immobility of the factors of production may lead to market failure. [10]

Market failure can be defined as the failure of the free market mechanism to provide goods in a socially optimal and thus efficient manner, and is usually attributed to imperfect markets, the existence of externalities, the lack of provision of public goods, and inequity. Imperfect information and immobility of the factors of production also lead to market failure, because they directly contradict the assumptions of the free market system. The two main assumptions violated are firstly that all participants have perfect information, and secondly that the factors of production are mobile, such that they can respond to changing prices which function as a signal for producers to move resources into various areas of production. With those assumptions violated, Pareto optimality - when one person cannot be made better off without making someone else worse off - cannot be derived from perfect competition in a free market. This paper explains carefully why imperfect information and the immobility of the factors of production lead to market failure.

The free market system assumes that consumers have perfect knowledge of costs and benefits, thus the market-clearing equilibrium is able to be reached when individuals’ valuation of the good equal suppliers’ marginal cost of production; hence demand = supply. But in reality, consumers are often ignorant about the quality of the goods and durables they purchase. These are cases of imperfect information, which cause market failure as individuals are unable to fully obtain the marginal benefits of the good. As the market demand curve is derived by summing up all individual demand curves an optimal market equilibrium cannot be derived. On the supply side, firms are often ignorant of market opportunities, prices and costs, and may often make inaccurate estimations of market consumer demand or fail to respond promptly to demand changes due to errors in judgment. Thus market failure occurs.

Imperfect information is present when consumers and producers do not or are unable to consider society’s benefits and society’s costs, as reflected in the diagrams below.

Insert Economics diagrams here: HINT, draw externality diagrams. Why externality diagrams?

In the first diagram, there is an overproduction of a good distorting the market. Negative externalities, if unknown to producers, or if they merely consider their own private costs benefits and ignore society’s efficiency, also result in market failure, but this time in overproduction of a good.

In the second, there is an underproduction distorting the market. Consumers often have lower than optimal demand for desirable public goods, for example healthcare and education, as they only take into account current utilities, failing to judge the full extent of welfare and benefits the good delivers to society. This presence of unacknowledged positive negative externalities results in the underproduction of the good. Hence, the failure to acknowledge externalities is a lack of full or perfect information that distorts the market.

For private markets to function efficiently, factors such as labor and capital must be able to move freely. If factors are immobile, due to perhaps occupational rigidities and inefficient job seeking processes and bureaucratic issues, it affects the supply of these knowledge-based products. This immobility can lead to the wrong price signals and inefficient allocation of resources to these industries. For the socially optimal equilibrium to be reached, firms and labor must respond to market signals. When firms have trade unions as stakeholders, markets tend to fail as unions tend to aggressively seek minimum wage rates or protect their wage benefits or restrict entry of new labor, even in the face of declining market demand.

Hence, both imperfect information and lack of mobility of resources affect the workings of the price mechanism in the free market, and because perfect competition fails, then there is market failure, and the Pareto efficiency promised by perfect competition in the free market does not arise.

JC ECONOMICS ESSAYS - Tutor's Comments: This Economics essay is rather well written and addresses the issue of market failure well. There are many good aspects to learn about it. However, it was not written by an "A" level student but was written by a trainee teacher (trainee tutor) from education school. Perhaps, as improvement, the author should have also compared and contrasted asymmetric information with imperfect information. For more information on asymmetric information, see George Akerlof and Michael Spence (for further advanced Economics readings).