The document summarizes topics covered in a class on health, safety, and pollution. It announces upcoming assignments, reviews a problem on hospital stays, and previews discussions on safety and pollution. For safety, it argues firms have incentives to adopt cost-effective safety measures to gain a competitive cost advantage. For pollution, it introduces Pigouvian taxation as a policy tool.

1. Health, Safety, & Pollution
May 29, 2013

2. Announcements
• New problem set on “Policy” due Friday
• Next week is last week of class
• Now is a great time to redo your problem sets if
you are not an expert on doing the problems!
• Next week I’ll post some practice final materials

3. Last Time
• Got our hands dirty figuring out the exact
differences between minimum wage and EITC
– I was really happy about your work. Well done!
• Started talking about health insurance, and in
particular, inefficiency in hospital care.

4. Today
• First, we’ll review the “hospital stay”
problem.
• Then, test-like clicker question.
• After finished, move on to “safety” and
“pollution” and repeat format.

5. Health: The Demand for Hospital Care

6. Let the market for hospital stays be described
by PS=5+(3/4)Q and PD=10-(1/2)Q. What is the
size of DWL from full health insurance?
A. There’s none.
B. 4
C. 8
D. 10
E. 20

7. Workplace Safety
• Safety has costs and benefits
– Hypothesis: Optimal amount of safety is set by
cost-benefit principle
• We can argue that safety is a byproduct of perfect
competition . . .

8. Competition Through Safety
• Consider a firm that pays workers $2,000/month
– Should the firm install a safety device at a cost of $100 per month per worker
if each worker values the safety device at $200 per month?
– Yes! MB>MC => Should be efficient to install.
• Say the company installs the safety device and afterwards pays workers
$1,850/month.
– Employers’ net gain: 2000-(1850+100)=50
– Workers' net gain: (1850+200)-2000=50

9. Competition Through Safety
• Safety decisions based on the cost-benefit principle create a cost
advantage over competitors.
– In the previous example, the monthly cost of hiring a worker
fell by $50 (=2000-(1850+100)), because of installing the safety
device.
– Lower costs imply higher profits.
– So, all employers should provide the safety device in this
situation to profit maximize.

10. True or False? Perfect competition implies that
factories should install safety devices costing $X
for any $X>0.
A. Always True.
B. Always True if the device costs less than the wages
the firm pays without it.
C. Always True if workers value the device exactly at its
cost.
D. Always False if the device is very expensive.
E. Always False if it workers do not value it.

11. Pollution: Pigouvian Taxation

12. In which industry would a Pigouvian tax be
most effective in increasing public welfare?
A. cigarettes
B. alcohol
C. electricity
D. plastic