Demand for Health: Grossman Model- II

Summary:
Three roles of health in Grossman model
An optimal day
Production Possibility Frontier for H and X


Three roles of health in Grossman model:
Health as a 
Consumption good: It contributes directly to the individual's utility function each period. Being healthy is valuable in itself.
Input into Production: It generates productive time Tp which is useful for producing more H and X.
Capital: Unlike the 'other goods', it endures from period to period. It can accumulate (or depreciate) over time. So, improvements in health today can lead to better health tomorrow.

An optimal day:
The optimal levels of H and X in any given period depends on decisions that are right for a lifetime, not just for a single period.

Production Possibility Frontier for H and X:
Production Possibility set traces out the possibility of H and X that are attainable given individuals budget and time constrains. The edge or Frontier of this set is called the Production Possibility Frontier (PPF).
             Standard model: PPF

 
Resource Allocation to one of H (or X) means less of resources for X (or H)







            Grossman's Model: PPF


Individuals with low H will have few resources to produce any X at all (zero X).
Point A: H=Hmin, No production time is available, No 'other goods' X.
Point B: H>Hmin, healthier, even small improvements in H yields large increase in productive time and X(free lunch zone). 
Point C: Maximum X possible.
Point D: Increases in H yield only small decrease in sick time (financing in H means less resource for X).
Point E: All time and money on health (Totally ignoring X).


How does an individual choose the optimal mix of H and X?
There is no optimal point in free lunch 'between A and C'. Optimal point lies in Trade-off zone to E.
Free lunch zone: Both H and X can be increased and hence are positive inputs into utility function.
Allocations in A: C does not tale advantage of all opportunities and leave free H and X.



Optimal allocation lies in Trade-off zone (C-E). Exact location depends on his taste for Health (H) and 'Other goods' (X). Optimal allocation lies on the point D, where Indifference curve touches PPF. Individual trade-offs health with consumption of some 'other goods'. 











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