Thursday, 22 May 2014

What Is a Model, Anyway?

In yesterday's post, I briefly outlined the events of a small altercation involving NHS-related comments made by Professor Steve Levitt. Professor Noah Smith asked for a model, but was not happy with what Professor Levitt provided (see yesterday's post for links).

But Professor Levitt did provide a model! Granted, he starts out by discussing the policy proposal, so the small model is a bit buried in his blog post, but it is there, and it goes like this:
If it turns out that consumers are sensitive to prices (i.e. that the most basic principle of economics holds, and demand curves slope downwards), total spending on health care will decrease.
Professor Levitt goes on to highlight two important sources of the decrease in expenditure, namely that low-valued services consumed only because they come at a zero price will be cut out by consumers who have to pay a positive price for them, and that competition for consumers who are now price sensitive will lead to increased efficiency.
The model is not very fleshed out, but I am not sure it really needs to be (Professor Levitt refers to simulations of the model also, but does not go into details). The essence of many hugely successful models in economics can be described in just a few simple words and that is a most welcome thing.

There are details for which Professor Levitt's model does not account, but maybe there are not too many of them, since Professor Smith embraces the policy proposal which is based upon the model. This strengthens the case for viewing health care as a market fairly much like other markets.

What would a model of Weetabix consumption look like? Well, one should start by positing that marginal willingness to pay is decreasing and that consumption stops once marginal willingness to pay is below the price. Welfare losses can result if prices are nor permitted to equate marginal cost and marginal willingness to pay; services are consumed which cost more to produce than the value consumers place upon them. An analogous market for health care will have similarly important policy implications.

This is not too advanced and will impress few people, but the criticism which Professor Levitt's model has come across, coupled with the widely agreed-upon sense of the resultant policy proposal, is evidence, both that the simple lesson needs to be said, and that remarkably simple models can be remarkably useful.

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